Budget puts the ball in RBI’s court

From Business Standard

Finance Minister Arun Jaitley’s third Budget performed a delicate task of prioritisation: meeting additional spending burdens while staying on the previously announced path of fiscal consolidation. Jaitley kept infrastructure spending elevated while also addressing the slowdown in the rural economy; yet his estimates of increases in tax revenue were generally agreed to be reasonable, with the additional revenue coming from non-tax sources including disinvestment and spectrum auction receipts. This fiscal discipline will have increased pressure on the Reserve Bank of India to cut rates and spark an investment and growth recovery.

Jaitley had a tough fiscal hill to climb. The Seventh Pay Commission award and acceptance of One Rank, One Pension sent his wage and pensions bill up. The outlay for wages and salaries has increased 55 per cent, and pensions 28 per cent – an overall increase of 43 per cent. Even so, the Budget ended speculation by keeping the fiscal deficit for 2016-17 at 3.5 per cent of gross domestic product, or GDP.

The fiscal arithmetic was conservative enough to please most observers. The increase in nominal GDP was estimated as being 11 per cent; tax-to-GDP ratio was seen as falling marginally, from 13.2 per cent of GDP to 13.1 per cent.

This was achieved through an increase in non-tax revenue of 24.8 per cent. A big component is to be revenue from telecom spectrum of Rs 99,000 crore – an increase of 76 per cent over the revised estimates for 2015-16. Disinvestment is budgeted to bring in Rs 56,500 crore in 2016-17 – although it brought in only Rs 25,300 crore of a targeted Rs 69,500 in 2015-16.

Meanwhile, non-Plan spending has been compressed – defence capital expenditure has grown only by six per cent over the Revised Estimates for 2014-15, for one. Overall, non-Plan expenditure is to grow only 9.1 per cent, with only a marginal increase in subsidies. In fact, the outlay for food subsidy is Rs 4,600 crore lower than the Revised Estimates, and for fertilisers subsidy, Rs 2,400 crore lower.

Using the resources he had thus husbanded, Jaitley focused on rural spending, made politically essential by two successive poor monsoons. But infrastructure also received much attention. Jaitley said a total of Rs 2.18 lakh crore would be spent in 2016-17 on roads and railways – this is a combination of support from the Budget and various bonds to be raised from the market. Overall, Plan expenditure is up 15 per cent in 2016-17 – over and above the infrastructure push announced in the last Budget.

Meanwhile, the super-rich were hit twice. Dividend income of over Rs 10 lakh will face tax of 10 per cent in addition to the dividend distribution tax; and individuals with income over Rs 1 crore face a surcharge of 15 per cent, up from 12 per cent. However, professionals earning up to Rs 50 lakh will be able to take advantage of the presumptive income tax scheme, cutting down on their paperwork. This option will also be open to small and medium enterprises with income up to Rs 2 crore.

The finance minister also made significant progress on tax reform. Several settlement mechanisms for disputes were announced – including an offer to companies in dispute over retrospective tax demands. A “compliance window” for undeclared income, to be taxed at 45 per cent, no questions asked, was announced. Those taxpayers in dispute for sums up to Rs 10 lakh are to be allowed to settle their cases on payment of the tax assessed, with no penalty; marginal penalties were announced for other cases.

The stock market responded choppily to the Budget, with the Sensex swinging 850 points during the day – but finally closing near its 21-month low. The bond market, however, responded positively to Jaitley’s check on government borrowing, with yields on government securities falling by 15 basis points.

Major progress was made in the Budget on some politically painful aspects of the outstanding reform agenda. An old demand was to bring the tax characteristics of the National Pension System (NPS) in line with that of the Employees’ Provident Fund (EPF).

The FM announced that deposits into the EPF made after April 1, 2016, would be taxed at withdrawal using the same formula – 60 per cent of the corpus being taxable – as the NPS.

There were also some pacifiers for the middle class. Twenty million taxpayers earning less than Rs 5 lakh a year will receive a tax rebate of around Rs 3,000. The house rent exemption was raised from Rs 24,000 to Rs 60,000. However, an additional cess – for rural infrastructure – has been announced on services, taking the total effective service tax rate up to 15 per cent from 14.5 per cent. A special infrastructure tax will be levied on cars – at a rate going up to four per cent for luxury SUVs.

Meanwhile the rural focus of the Budget, stressed by both the prime minister and the finance minister, meant a high outlay for the rural roads scheme, and the promised electrification of every village by 2018.

The new scheme for expanding irrigation to rain-fed areas was also funded – altogether, irrigation and agriculture spending went up from Rs 25,988 crore to Rs 47,912 crore, an increase of 85 per cent.

There was big news for the banking sector. While there was disappointment that only Rs 25,000 crore had been set aside for bank recapitalisation – which will cost many times more in total – the finance minister indicated that moves were afoot to consolidate banks. For the first time the question of privatisation was openly mentioned, with the FM saying that government stake in IDBI Bank might be taken below 51 per cent. Foreign direct investment will now be permitted through the automatic route at 49 per cent in insurance and pensions sectors, and up till 100 per cent for asset reconstruction companies.

Private-public partnerships (PPPs) have been held up repeatedly by disputes between the government and private operators; the FM said guidelines for the renegotiation of PPPs would be released, and a law for dispute resolution in such cases would be introduced.

The promised rationalisation of corporate tax rates was begun, but cautiously. Primarily a limited number of smaller firms and new manufacturing firms would be able to benefit from lower tax rates. Meanwhile, some exemptions were phased out; IT will be hit by a capping of accelerated depreciation at 40 per cent, and deductions for research will be progressively limited.

The finance minister announced that a pilot scheme for direct benefit transfers of the fertiliser subsidy would be undertaken in the coming year. In order to help welfare reform, Aadhaar will finally be given backing through a law – which should help it surmount challenges in the courts.

Flagship schemes like Make in India and Start-Up India got a look-in, too. Companies hiring low-skilled workers with salaries of up to Rs 15,000 a month will have the employee contribution to the EPF taken care of by the government. There was considerable tweaking of Customs rates to aid domestic manufacturing. Start-ups were provided tax breaks, including 100 per cent deduction of profits for three of their first five years.

But whatever the fate of any other announcement this year, Arun Jaitley will certainly have left his mark on the Budget-making process in one way: He has promised that, after the current Plan period, the distinction between Plan and Non-Plan expenditure – long criticised, including by government committees – will be phased out.


THE KEY ISSUES

CORPORATION TAX
Option for New manufacturing firms to be taxed at 25%; one-time dispute resolution for retro tax

PROVIDENT FUND
Future deposits to be taxable in part when withdrawn

DIVIDENDS
Income of more than Rs 10 lakh dividends to face tax of 10%, in addition to DDT

AGRICULTURE CESS
Raises service tax rate to 15%, besides additional tax on cars


I-T REVENUE

  • 18 per cent
    Increase in income-tax revenue Budgeted, with voluntary disclosure of unaccounted income to be taxed at 45%

SPECTRUM CHARGES

  • Rs 99,000 crore
    Expected revenue from spectrum fees levied on telecom operators, an increase of 76%

INFRA PUSH

  • Rs 2,18,000 crore
    Total outlay on roads and rail, as part of the govt’s infra push

PRESUMPTIVE TAX

  • Rs 50 lakh
    To cover professionals with gross receipts of up to Rs 50 lakh; MSMEs with income of up to Rs 2 cr

Leave a Reply

Your email address will not be published. Required fields are marked *