Finally, the most hyped annual ritual is knocking at our door ~ the Union Budget to be presented by the Finance Minister on 1 February. This is perceived to be a crucial budget before elections to five states during the current year and the general election in 2024. Even otherwise with our economy taking a hard hit from the pandemic, this year’s Budget is expected to lay a roadmap for economic recovery by ensuring tax and policy stability. One must wait and see the interplay between good politics and good economics.
There is a widely held belief that this year’s budget will most likely focus on demand generation, job creation, and sustaining the economy on an 8 per cent plus growth path after the slump of the pandemic.
To give credit to the government, it had embarked on a series of structural reforms much before the pandemic hit us. These efforts accelerated post the pandemic and are likely to bear fruit in the next few years. Recent data suggests that growth is gaining momentum. The resilience amongst businesses and consumers, and the improving economic fundamentals will help India tide through successive infection waves. That said, a weak labour market and inflation pose downside risks. The pace of vaccination and operative government policies will be the cornerstone of a sustainable economic and industrial recovery.
In this framework, if India is going to break into the next generation of economic reform, there is a dire need for bold steps both on the expenditure and revenue sides.
In a season troubled by the third wave of the pandemic, and excited by the forthcoming Assembly elections in five states, can we expect anything dramatic in the Union Budget? Perhaps not, in order to not disrupt a fragile recovery, though the underlying pentup energies are straining at the leash.
Among many things being asked for, two things stand out. The first are growth-oriented announcements that exceed our expectations. An example is the handsome effort to attract semiconductor manufacturers to India. The second is a widening of the tax base to encompass every bank account and digital payment platform user. The time has come to put all citizens on the same basis with no one outside the tax net. We have long been doing it in our indirect taxes that skim everyone without fear or favour, so why not? Our indirect taxes are, in fact, heavy.
Growth, estimated at 9.2 per cent in GDP for FY22, can indeed come from multiple sectors both traditional and frontier. Newbies include start-ups and unicorns, pharmaceuticals, software and increasingly, electronic hardware. The export of BrahMos missiles, and other made in India high-value defence items to other countries such as Vietnam and the UAE, in addition to the Philippines, is a frontier sector. The grand start of a high-end semiconductor manufacturing industry in collaboration with Taiwan, and possibly South Korea and the US, is another.
The already extensive services sector that accounts for over 54 per cent of the economy (Rs 101.47 trillion or $1,439.48 billion in FY20), will chug along, perhaps to become 75 per cent of an enlarged pie, like in the US. Economically speaking, agriculture will assume a smaller percentage of the whole, despite its high-profile farmers, their political clout, their woes, and their agitations. Infrastructure development, including roads, tunnels, bridges, city metros, the railways and freight corridors, already in high gear, will boost medium to long-term gains, even as large expenditure on infrastructure shores up present GDP rates.
Real estate too is likely to revive now and pull itself out of a long slump. It is the second biggest employer after inefficient agriculture and cannot be sniffed at forever for its cash-loving ways. Infrastructure development would require large resources to be committed by the government. Besides revenue from direct and indirect taxes the government’s plans to raise funds from disinvestment in public sector undertakings/banks assume great significance. Hopefully the FM would be pragmatic while considering the extent of funds to be raised through this route.
Personal income taxes involve barely 6.32 crore people out of a population of 1.40 billion. Even with an increase in collections of 60 per cent from a pandemic-hit low base in FY22, direct taxes account for Rs 5,15, 870.5 crore in net corporate tax, and Rs 4,29,406.10 crore from net personal income tax. This is a total of Rs 10,80,370.2 crores.
Contrast this with the total of indirect taxes that involve most of the public at an estimated Rs 11,02,000 crore in 2021-22. Of this, Rs 6,30,000 crore is expected to come from GST. It is a narrative for another day why the earning from DT should outnumber IDT because of the regressive nature of the latter. In other words, the incidence of tax under IDT falls equally on rich and poor and being a country with a massive, marginalized population, it is rather unreasonable to rely more on IDT.
The gross tax revenue for FY 22 is expected to be fed 28.4 per cent from corporate tax, 16.3 per cent from income tax, 14.7 per cent from GST, 14.2 per cent from customs duty, 22.4 per cent from excise and 3.9 per cent from other heads. But if an expenditure tax could raise 50 per cent of the gross annual tax revenue, expected to be 25.1 lakh crore in FY22, after the abolition of corporate and income tax, how would that be? A back calculation exercise will determine what the quantum of the miniscule expenditure tax should be spread over all users of banks and digital pay platforms. But one could begin with just 0.001 percent, with a view to increase it if necessary.
Every year there is a clamour for increases in income tax slabs and reduction of corporate tax. There is a demand for an increase in standard deduction, to be doubled to Rs 1,00,000 from the present Rs 50,000 this year too. The taxes applied to dividends and capital gains in the stock market also do not resonate with the aspirations of the investors. But the government is constrained by its funding requirements, and forever looking at new means to extend its tax net. The fiscal deficit of around 6.6 per cent of GDP exerts its own pressures.
Even taxes on fuel, a major irritant for consumers, are largely inelastic, especially in a pricey crude scenario. At the top level, the maximum effective income tax rate is a prohibitive 42.774 per cent, including all the surcharges. This is driving many businessmen and High Net Worth Individuals out of India to gentler tax regimes. And the bulk of the people who yield personal income tax are the salaried class working mostly in the formal sector. It is mainly they who have TDS deducted at source. This is not adequate in terms of numbers, as a tax-paying ‘captive’ class. Most businessmen and self-employed professionals avail of multiple tax reduction and legitimate avoidance measures. These are not readily available to the salaried class, beyond ELSS and allied provisions.
Besides, all those earning below Rs 5 lakh are effectively tax free now, a sizeable number. Corporate taxes too have been reduced to 25 per cent and even 15 per cent in certain cases. Covid has impacted business activity adversely. Businesses already running on losses or at marginal profits earlier have been severely impacted. In certain cases, business have turned from healthy to sick.
The FM would do well to consider the need for allowing, as a one-time measure carry forward of losses and Tax Holiday benefits, wherever applicable under the Income Tax Act for certain additional period in case of hospitality, tourism and aviation sectors in particular. Firms are being taxed at the highest tax rate. Contrary to this, corporates are taxed at 25 or 15 per cent depending upon what scheme they have opted for. It is argued that dividends paid by corporates are taxed in the hands of individuals. However, the profits in the hands of partners of firms are tax free, hence the justification for higher tax on firms.
It can however be argued that salaries paid to partners are not fully allowable to firms and at the same time are taxable in the hands of partners. So, it may be worthwhile to reduce the tax rate on firms to 25 or 27.5 per cent. Given the present revenue constraints any increase in tax exemption slab may not be feasible. But, the FM certainly needs to consider the idea of inflation rate-indexed tax exemption slab rates. It would be equitable from the viewpoint of tax-payers. The so-called unorganised sector, working below the government radar, accounts for over 80 per cent of all the companies operating. The proposal of a universal but minuscule expenditure tax has been mooted several years ago and has once again been mentioned by some analysts this year. Will the government embrace it this time? If it does, it could dismantle direct taxes, including those on corporations and individuals, HUFs alike. And all the costly administration cost on the CBDT as well.
The concept of tax avoidance would now apply to only those who refuse to use either the bank or any digital means. With an Expenditure Tax applied to every bank/digital transaction instead, the tax net would stretch to practically everybody now that the bulk of the unbanked have also been drawn into the net. If the expenditure tax is minuscule, say 0.001 percent as mentioned, it addresses the argument long offered by leftist economists that the rich should be taxed and not the poor. Taxation that even a poor man does not mind can still add up to a tidy sum. Let us hope that Budget 2022 is growth oriented and generates employment so essential to ensure smiling faces all around.
(The writers are chartered accountants)