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View: Budget 2020 is a building block for renewed emphasis on taxes

Aided by a lower base and indicators suggesting that the worst is over (detailed in the Survey), the lower end of that band is achievable.

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Last Updated: Feb 02, 2020, 12.03 PM IST
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By Bibek Debroy

Attention often focuses on the fiscal deficit-GDP (or revenue-primary deficit) ratio. Revised estimates for 2019-20 show this to be 3.8% while finance minister Nirmala Sitharaman’s budget projects 3.5% in 2020-21. As a ratio, any reduction more than 0.5% a year is not believable. Whether it is fiscal or primary deficit, the budget projects a 0.3% reduction.

This is entirely plausible. Minor deviation from Fiscal Responsibility and Budget Management (FRBM) Act apart, one should laud an adherence to the goal of fiscal consolidation. For both numerator (for tax revenue) and denominator, the ratio depends on GDP assumptions. The Economic Survey 2019-20 suggests a 6-6.5% band for real GDP growth in 2020-21.

Aided by a lower base and indicators suggesting that the worst is over (detailed in the Survey), the lower end of that band is achievable. Hence a nominal GDP growth of 10% assumed in Saturday’s budget is realistic. An excessively optimistic 11.5% would have made life difficult for both tax officers and taxpayers.

Over the revised estimates (RE) of 2019-20, the overall tax revenue growth is marginally short of 12%, not overly ambitious. On the revenue side, eyebrows may be raised at the disinvestment target of Rs 2,10,000 crore, especially because in 2019-20, GoI managed Rs 65,000 crore, not the projected Rs 1,05,000 crore. But given the ambitious disinvestment and privatisation programme — and since there is a timeline beyond the numbers figuring in budget calculations — such criticism is misplaced.

GoI’s policies are a continuation of what occurs on days other than Budget Day. There is continuity between the policies of the first Narendra Modi government and the second, highlighted by the FM towards the beginning of her speech.

While people have unrealistic assumptions of budgets, expectations should focus on taxes. Here, too, indirect taxes are largely the domain of the GST Council, though the budget foes mention simplification in procedures — cash rewards for customers who want invoices, simplified returns (from April 2020), electronic invoices and Aadhaar-based verification of taxpayers.

There is some rationalisation of customs duties, too, with an implied review of free trade agreements (FTAs) (rules of origin), safeguards, anti-dumping, and the interesting idea of crowdsourcing for suggestions on reviewing customs duty exemption.

For corporate taxes, reductions had already been announced, with choice factored in — an entity opting for a higher rate with exemptions, or a lower rate with no exemptions. Since an unincorporated enterprise pays personal income-tax rates, a similar initiative was expected for personal income taxation, even though citizens sometimes expect lower rates, with continuation of exemptions.

If there are expectations about government funding physical and social infrastructure, and compliance costs declining, one can’t expect the continuation of exemptions. Sitharaman has told us that there were more than 100 (120, actually) exemptions in the Income-tax Act.

In a simplification process, about 70 have been scrapped. For the ones that remain, there is now choice. The principle of choice is unexceptionable, although we have five slabs (six, if you count the segment below threshold). This means there are too many slabs, unacceptable if one is indeed simplifying. But the primary objective is exemption removal. Once revenue implications are clear, there will be fewer slabs. Savings have often been driven by tax-reduction clauses (such as 80C). Such clauses have also influenced form in which an individual maintains savings, distorting choice across savings instruments. A consequence of changes is a shift in the emphasis from savings to consumption, and making the nature of savings neutral vis-a-vis tax policy.

To state the obvious, choice is more exercisable for new taxpayers. Older taxpayers are often locked into existing savings schemes. One should also mention tax facilitation measures — PAN linked to Aadhaar, reduction of direct tax litigation, faceless appeals, and a charter for taxpayers (India will be the third country to have this).

Finally, there have been changes in the way dividends are taxed, deductions for startups, tax payment on employee stock ownership plans (ESOPs), audit thresholds for micro, small and medium enterprises (MSMEs) and tax concessions for foreign direct investment (FDI).

One should remember, GST is still a work in progress, and pending final recommendations of the 15th Finance Commission, a revamp of public expenditure has to wait. The 2020-21 budget is a building block.

(Author is the current Chairman, Prime Minister’s Economic Council)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
(Catch all the Business News, Breaking News Events and Latest News Updates on The Economic Times.)

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