March 02, 2021
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Budget 2021: A Call For Extraordinary Measures

The corporate sector has already been given enough attention in previous budgets. It’s now time to give some much needed relief to salaried middle class.

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Budget 2021: A Call For Extraordinary Measures
Union Finance Minister Nirmala Sitharaman
PTI File Photo
Budget 2021: A Call For Extraordinary Measures

Budget is more than a “Bahi-Khata” and it outlines the vision of the government. In addition to being a policy document, the budget is a political document as well because funds are allocated to various schemes which are aligned with the political ideology of the ruling dispensation. In a virtual summit organised by Confederation of Indian Industries (CII), finance minister Nirmala Sitharaman has already said that current year proposals would be one-of-a-kind.

International Monetary Fund (IMF) has projected a 11.5% GDP growth in 2021, which will likely make India the fastest growing economy. Although this double-digit growth will be primarily driven by low base effect and real growth as compared to pre-Covid level would be very minimal, it is still good from a sentiment point of view.

If we take IMF data as a base, then 11.5% real growth would mean a nominal growth of more than 15% and if we go by historical data then tax buoyancy will be higher than the nominal GDP growth. Despite an increase in revenue, managing fiscal deficit is going to be a tough challenge for government. This situation will put more reliance on non-tax revenues like disinvestment proceeds, dividend, spectrum sale etc. but past trend shows that disinvestment targets are difficult to achieve. Selling profitable ventures will always raise questions over business valuation but government should at least consider getting out of loss-making businesses. Tax amount locked up in disputes can be a gold mine for government if honest efforts are made. Government’s track record in minimising the litigation is very poor and this area needs adequate attention. The badly executed “Sabka Vishwas” and “Vivad se Vishwas” schemes can be a good lesson and a fresh start should be made in this direction. On tax devolution to states, fifteenth finance commission recommendations are not expected to materially impact the existing arrangement and therefore the central government will be relieved from this angle.

Economic impact of Covid-19 was primarily in the nature of cash flow crisis and it is going to impact non-performing assets of banks. RBI’s financial stability report released in January 2021 has already indicated a steep increase in NPA from 7.5% in September 2020 to 13.5% in September 2021 in baseline scenario and up to 14.8% in a severe stress scenario. Fund allocation towards bank recapitalisation would be needed to withstand possible asset quality deterioration. Current fiscal situation may not allow the government to recapitalise the banks out of consolidated fund and therefore issuance of specific bonds should be considered. Interest pay-out is the single largest component in the budgetary outlay and despite of all good intentions to manage this, Covid-19 crisis will compel the government to overlook this in upcoming budget.

A developing nation needs capital for economic prosperity and even though India received record FDI in the current year, it must be highlighted that most of it has gone to brown field investments. FDI cap should be increased in sectors like life insurance, construction, aviation etc. with appropriate safeguards. Apart from placing bid for foreign capital, finance minister should also consider steps to boost saving-GDP ratio which has gone down to 29.1% in 2019. Domestic saving plays an important role in capital formation cycle and increase in deduction limits in Chapter VIA of Income Tax Act, more particularly under section 80C will help in this direction.

Government has gradually provided various tax incentives to corporate sector and tax cuts announced in September’19 has already reduced corporate tax rates to a large extent. Though the intended objectives of this tax cut are not achieved, and we haven’t seen investment surge primarily due to existing surplus capacity and downfall in demand. Budgetary proposals should provide much needed relief to middle class and put more disposable money into the hands of common man to boost the consumption. For a perspective, small businessmen/professionals are also getting benefits of presumptive taxation and their effective tax rate is much lower as compared to salaried class.

On the tax mobilisation part, government should consider taxing money market and currency transactions. A tax like “Tobin Tax” should be introduced and relief should be given to salaried middle class. Government should also evaluate prospects of allowing tax consolidation of group entities in India to avoid multiple compliances. Government has already eased residency norms for individuals who were stuck in India due to flight restrictions and similar clarification should be given for corporate residency under Place of Effective Management (PoEM) Rules. If senior management of an outside company has spent considerable time in India due to flight restrictions, then it would be unjust to tax the foreign company under PoEM Rules. Clarificatory amendments should be made to address concerns related to equalisation levy but the levy per se must continue.

The corporate sector has already been given enough attention in previous budgets. It’s now time to give some much needed relief to salaried middle class. 

(Shshank Saurav is a chartered accountant and public policy analyst. Views expressed are personal and do not necessarily reflect that of Outlook Magazine.)


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