The Budget is here, well almost. Hectic parleys have been on for its preparation and finalisation. Prime Minister Modi met top industry leaders to seek suggestions and Finance Minister Nirmala Sitharaman is also meeting industry associations to get their inputs: some of these wishlists could go into shaping the final Budget document.
The Indian economy is facing significant headwinds and the GDP growth for financial year 2019-20 is expected to be 5%, the lowest in the last 11 years. Retail inflation for December 2019 jumped to 7.35% highest since July 2014.
The government is facing sluggish growth in tax receipts, resulting in a tight fiscal deficit position. In 8 months up to November 2019, the government had received only 50% of its budgeted revenue estimates. Fiscal deficit has reached 115% of its budgeted estimate.
This after the government received Rs 1.48 lakh crore as dividend from RBI, Rs 58,000 crore more than factored in the Budget. Its disinvestment plan of raising Rs 1.05 lakh crore, too, is in complete disarray.
The government has announced a series of measures and the RBI has reduced the repo rates by 135 basis points in last year, but these steps have not had any positive impact on the economy. Even the reduction in corporate tax rate from 35% to 25% has not enthused companies to invest.
Consumer spending in India declined for the first time in more than four decades in 2017-18, Business Standard reported, citing a government survey that has yet not been released.
Critics argue that the announcements have mainly been on the supply side, while the economy is facing a demand side issue.
Even the corporates are now clamouring for a reduction in tax rates for individuals and/or reduction in GST rates to increase spending power of the consumers and boost sentiment. Leaving more money in the hands of individuals will encourage them to spend and/or save more.
However, all might not be lost. Here are four steps that the finance minister could take to revive the economy and boost demand:
1. Reduce income tax rates for individuals
Our current tax rates/structure is very lopsided. We don’t have a 10% tax slab and effectively tax rates start at 20%, as effectively income up to Rs 5 lakh is exempt from tax.
The tax slab of Rs 5 to 10 lakh per annum draws a tax rate of 20% which is very high. While we have just 4 tax slabs and rates, the United States, South Africa and China have 7 each, Russia has one flat rate, while Singapore has 11.
Not only do we have fewer tax slabs and rates, our highest tax rate of 30% kicks in at a much lower income level (> Rs 10 lakh) compared to global rates.
In China, 30% tax rate is applicable on income above Rs 42 lakh (> 4x). In the USA, income above Rs 10 lakh and up to Rs 27.5 lakh is taxed at just 12% (one-third our peak rate). In South Africa, 31% tax rate is applicable on income of about Rs 15 lakh and above.
The Rs 5-10 lakh income bracket tax rate should be reduced from 20% to 10%, Rs 10-20 lakh should be taxed at 20%, and income above Rs 30 lakh should be taxed at 30%.
2. Reduction in GST rates
A reduction in tax rates will benefit the taxpayers, who are only around 7 crore in number. Indirect taxes are something which is paid for by everybody. The finance minister could look at reducing the tax rates from 18% to 12% and from 28% to 18%.
This is likely to have a bearing on the government’s revenue receipts but would give a boost to consumption. The increase in volumes is likely to offset the loss in revenues due to this reduction, though, with a time lag.
3. Increase exemption limit for investments (Section 80 C)
Currently investments up to Rs 1.5 lakh are tax-exempt. The government should raise this limit to Rs 2-2.5 lakh. India’s savings rate has fallen from 37% of GDP in 2007-08 to 31% now.
This step will give a boost to savings rate which is required for investments and also reduce pressure on the Current Account. The real estate sector is bleeding. Currently, interest on home loan up to Rs 2 lakh is allowed as a deduction from income. This can be increased to Rs 2.5-3 lakh.
4. Make interest income of senior citizens tax-free
Senior citizens account for around 8%-9% of the Indian population. More than 60 lakh taxpayers could fall in the senior citizens category. Currently, interest income up to Rs 50,000 p.a. is exempt from tax. A deduction of Rs 50,000 for health insurance premium is allowed. Rs 1 lakh is exempt on medical expenditure for specific critical illness.
As most of the income of senior citizens is from Fixed Deposits, this should be made tax-free. This will help them cover their medical expenses and other emergencies. Also, it will encourage people who cannot afford to visit their religious places to do so, thus giving a boost to the tourism sector.
These steps are likely to trigger a multiplier effect resulting in more sales and profits for the companies. More sales would push companies to expand capacities to meet increased demand, leading to higher investments and job-creation. Additional savings by individuals could boost credit lending by banks and financial institutions.
All this will give a fillip to GDP growth and help India emerge out of the economic slowdown.