The top PGDM college in Delhi NCR, Ishan Institute of Management & Technology believes that the Union Budget 2017 shall be an acid test of the FM and his government’s resolve to stay put on the path of fiscal prudence amidst global and national challenges. The Trump administration is expected to stay put on the agenda of an expansionary fiscal policy in the United States that could lead to eventual crowding out effect in the financial markets by revising interest rates upwards. Secondly the signs of a recovery in the European Union post BREXIT seem farfetched. As such then it becomes increasingly evident that the torch of free market economic reforms and capitalism has been shifted into the hands of South Asia-particularly China and India. What remains to be seen is how the FM tries to do the tight rope walk of staying committed to the target of 3.5% of fiscal deficit to GDP ratio in the financial year 2017-18 and revises it further to 3% in the pre-election year. The last three budgets of the FM have been big on ideas and have therefore focused on strengthening social sector expenditure and increasing capital expenditure on big ticket infrastructure development programs like the Digital India campaign, the Make In India campaign, a trade and investments based foreign policy that seeks to actively engage with Eastern neighbours like China and Japan and finally the highly ambitious bullet train project. Yet one would like to believe that it is for the FM to set a precedent of fiscal prudence and discipline by rationalizing public expenditure with tax reforms, outcome based budgeting instead of the populist outlay based budgeting and transparency in efficient public expenditure programs.
Economic Federalism and GST
There are multiple areas of conflict between the centre and the states that has over the years affected economic federalism. The FM has in effect pulled off a coup d’état by being able to formalise the passing of the GST before the Union Budget 2017 and while the disruption of the Parliament in the winter session may have marred the politics of GST, it does remain a masterstroke from the FM after years of centre-state tug of war in financial relations.
1. In some cases the entire revenue is allocated among the states. Yet the rates and bases of taxes were decided by the centre regardless of the desires and priorities of the states.
2. Central governments have in the past failed to take initiative to impose all the taxes as per Article 269 of the Constitution, the net proceeds of which were all appropriated by the states.
3. Central governments have in the past raised the excise duties as also special and auxiliary duties but not yielded any proportion of such incremental tax revenues to the states.
4. While income tax rates have been unchanged or even occasionally reduced, the 85% allocation of income tax revenue seems to have reached a ceiling.
5. The central governments in the past have raised the exemption limits on income tax without much revenue loss because it raised the surcharge on income tax. The states had to lose because the proceeds of the surcharge were not shared with the states. Hopefully GST shall bring a refreshing change in the equations of economic federalism and bring a much needed status quo.
The Roadmap for Tax Reforms and the Union Budget
The Union Budget 2017 needs to and shall hopefully streamline the tax system unlike ever before. To this extent it may be remarked that India’s tax system has historically suffered from the following weaknesses.
1. Distortive Nature: About 30% of tax collections come from customs duties. This is a distortive tax that needs to be lowered as part of economic reforms.
2. Inconsistency: There was undue reliance on indirect taxes during earlier governments. A lack of balance between direct and indirect taxes implies fiscal imbalance.
3. High Corporate Tax Rates: There is mounting pressure to reduce the rate of corporate taxes from 35% to a level of 20% to induce investments.
4. Tax Compliance: Tax compliance in India is unduly complex, a point that has been reiterated by corporate leaders and former bureaucrats. A centralized tax administration with uniform rate of taxation without any exemptions shall create a more level playing field. GST is the correct step in this context.
5. Phased Removal of MAT: The government in 1997 was concerned with the exploitation of depreciation provisions by firms in order to avoid paying income tax. This had led to the introduction of the Minimum Alternate Tax. Under this system originally, a company with taxable profits of less than 30% of its adjusted profits was required to pay a minimum tax of 30% of the book profits at the then existing rates. In light of the current scenario, the FM may consider a phased removal of the MAT to bring some joy to the beleaguered corporate sector. The FM may also consider the removal of MAT from the affordable housing segment to enable the real estate sector pick up momentum going into the new financial year. On a concluding note, the FM shall do well to strike a note of caution on the side of fiscal prudence in this Union Budget, feels the top PGDM college in Delhi NCR.
After the stupendous increase in public expenditure on infrastructure development under the PMGSY last year that amounted to an outlay of INR97,000 crore it may revised downwards.
Two years before the Lok Sabha elections in 2019 is an apt time to reduce the burden of interest payments on bonds. Last year the FM had an outlay of INR15,000 crore through issue of infrastructure bonds. The additional INR31,000 crore that was raised last year through issue of bonds for NHAI, NABARD, REC and PFC may be reviewed this year.
The allocation of the outlay of INR25,000 crore for public sector banks that was announced last year may be reviewed. The outlay is well short of the required capital injection as per BASSEL norms and yet costs the ex chequer. Banking sector reforms and issue of licenses for establishment of new private sector banks may be considered. Also Life Insurance Corporation of India with its tremendous capital stock may be considered for equity stake holding in banks. If there is a need for a big idea in this year’s Union Budget at all, top priority should be accorded to considering privatization of underperforming public sector banks.
No government can live beyond its means. These were the words of the last PM and legendary economist Dr. Manmohan Singh. We hope the FM stays put on the path of fiscal prudence in this Union Budget 2017.