Arun Jaitley this Budget will give from one hand, take from another
If this, then that…
- If corporate tax rate will be slashed, personal tax rate cuts will follow.
- If personal tax rates are reduced, poor will be offered sops via UBI.
- If UBI is implemented, tax rates on services will rise sharply.
- If service tax rates are high, expect little from indirect taxes/GST.
Here’s why:
The finance minister has a commitment to reduce the base rate of corporate tax from 30 pc (actually, with cesses and surcharges it comes to nearly 34 per cent) to 25 per cent by 2018-19. If Arun Jaitley is true to his words, at least a part of this has to be reduced in Budget 2017-'18 since a five per cent reduction in the final year will create havoc with the kitty and is highly unlikely. Hence, analysts are convinced corporate tax rate will be cut to either 28 or (more optimistically) 27 per cent this Budget. Remember, UK has brought down corporation tax to 20 per cent and President Donald Trump has committed reducing it to 15 per cent in his term.
If India’s corporate tax rate goes down to 28 or 27 per cent, personal tax at 30 per cent will become untenable. Well, who would like to give the opposition another chance to take the “Suit-Boot ki Sarkar” jibe at the government yet again! So, the highest slab of personal tax rate will also need to be cut down to 28 or 27 per cent, proportionately. This may be supported by raising the band for lowest tax rate from 2.50 lakh to Rs 3 lakh. And if the finance minister is really generous, perhaps, bringing back the standard deduction of Rs 20,000 or so.
But then personal tax sops only benefit the salaried class/middle class, after all.
What about the poor?
Hence, if personal tax is sliced, then expect sops for the poor as well. Think of what could be the master-stroke this Budget to win over the electorate in the five states going to poll right after the Budget!
The answer lies in Universal Basic Income (UBI), a concept borrowed from the West’s social security initiatives. Each unemployed adult to be transferred Rs 1,500 per month directly into the bank account via Aadhaar as basic monthly income for survival. For the estimated 200 million potential beneficiaries, the UBI likely to cost the exchequer nearly Rs three lakh crore. That’s not that kind of money the government has in hand. In fact, it’s 30 per cent higher than the Rs 2.30 lakh crore the government spends on subsidies. Hence, schemes such as MGNREGA, among others, are expected to be folded into the UBI. The scheme may not cover the entire 200 million in the first few years. Rather, the government may target only the bottom of the pyramid among the below poverty line (BPL) in the initial phase.
Now, if the government will take a hit on corporate tax and personal income tax besides spending more on welfare measures such as the UBI, it will need to scoop the money from somewhere. While some of that need will be covered by the annual eight-nine per cent growth in direct taxes and 15-16 per cent growth in indirect taxes, but for the rest the government will rely heavily on the bonanza coming from Service Tax.
With GST coming into force this year, the current 14 per cent (with cesses and surcharges it’s 14.5 per cent) rate of service tax will need to be aligned with the 18 per cent projected base rate of GST — a four per cent bonanza that will flow into the government’s kitty. That kitty will swell further since more services are projected to be brought under the service tax umbrella as the government prunes the negative list further. The service tax kitty will balloon if the finance minister decides to implement band of 12-28 per in tax on services (like the GST on goods) instead of the flat 18 per cent, as was envisaged.
If that is so, the government will have little leeway in reducing indirect taxes (which are the bulk of the taxes).
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| Photo: Indiatoday.in |
More so, because the finance minister’s and the Centre’s elbow room is going to be limited once GST replaces most indirect taxes most likely on July 1, 2017. After all, the GST rates will be decided by the GST Council where chief ministers of various states are represented and have a majority say. Besides, the Centre is committed to a ‘zero impact’ on state finances for five years after GST implementation. Since any cuts in GST rates will undergo severe scrutiny of the states, they will be highly contentious.
Hence, it’s likely the Centre will use its leeway in direct taxes in offering sops to the masses, rather than in indirect taxes.
Also, remember, this is a make-or-break election year for the BJP/NDA. With an eye on the state Assembly elections, one of the objectives of this Budget will be to offer a balm to the masses, pensioners, working women and businesses after being ravaged by the effects of demonetisation. There is no better way to do that than cuts in direct taxes since they touch them directly.
As for triggering an economic revival through the Budget: rather than a stimulus via cuts in indirect taxes, it’s likely the push will be through supply-led growth with government pumping in more funds into infrastructure to kick-start a manufacturing revival. While sectors that don’t directly benefit from supply-led growth through infrastructure funding may be offered minor cuts in GST rates/indirect taxes to trigger demand.
But, simply put, the finance minister may give from one hand, and take from another.