Prime Minister Narendra Modi recently remarked, ‘Our times call for a quantum leap and not incremental improvements.’ Our budget expectations run along that intent in letter and spirit, based on the hope that ‘faith can move mountains’.
Incentivising digital payments
In the wake of demonetisation, there has been a sustained push from Government towards digital transactions. The digital payment mode is built on sound economic fundamentals and giving it a boost is only logical. The Budget should incentivise the use of digital channels by removing service tax, nudging financial institutions to decrease transaction charges and mandating targets for banks to set up PoS terminals.
The Budget should not try to push people towards the digital space by disincentivising cash transactions (through a cash transaction tax, or its like) as a pull-strategy would be much more organic and sustainable in the longer run over a push-strategy.
Boosting consumption by revising tax slabs
The current tax slabs are archaic. In light of the slow-down in GDP growth, consumption can give the much-needed fillip instead of increased Government spending which will only pose problems for the Government in adhering to the fiscal deficit roadmap.
The Government should, instead, do away with all tax slabs below ₹10 lakh and put a uniform 30 per cent tax slab for income over ₹10 lakh. The tax receipts from the slabs below ₹10 lakh are anyway less than 25 per cent of the total income-tax collected, which itself is approximately 40 per cent of total direct tax receipts which, again, are a part of total revenues which includes indirect taxes.
Simply put, this move would be but a minor trimming to the exchequer. It would be a welcome breather to a lot of taxpayers and simplify complexities in tax computations. Also, there should be an announcement to the effect that the Government would periodically (every three years or five years) adjust the 30 per cent slab to account for inflationary pressures.
Rationalising farm taxation
There have been instances in the recent past about individuals claiming multi-crore earnings to be agricultural income and escaping the tax net. This highlights how the taxation regime can be circumvented through the conduit of farm income. Tax rates should kick in even for agricultural income beyond a minimum threshold (of ₹30 lakh or so) accounting for the high levels of uncertainty in farming.
At the same time, there are inconsistencies in taxation for allied sectors such as animal husbandry, not considered under the ambit of agriculture. This would mean all dairy farmers would be liable to pay tax. Realising that the majority of people employed in animal husbandry are themselves small and marginal players, taking the necessary corrective measures may lead to benefits for this segment.
New paradigms for infrastructure funding
The EPFO and LIC hold a large corpus of cash, earning sub-optimal returns in the debt market. If the budget makes a sovereign guarantee to the financing of Railways, highway projects that are financed by the EPFO, LIC and other quasi-governmental bodies with large cash-chests, it will give a great fillip to all basic industries such as cement, steel, and so on, translating to higher GDP growth. The government should also address the concerns of FPIs and FIIs (especially regarding dividend repatriation and other contentious issues) and increase the favourability of real estate investment trusts (REITs) and Infrstructure Investment Trusts (InvITs).
Revising MSME classifications
The classification of MSMEs, based on turnover, has not seen revision for a decade. Advances in technology, the proliferation of economic activity and inflation would have made the earlier turnover thresholds irrelevant. Revising these limits would make firms on the margin eligible for financing under the priority sector lending (PSL) mandate of financial institutions.
Moreover, the PSL norms themselves need a relook. There has been an increasing use of PSL certificates to meet PSL restrictions. Some financial institutions have, apparently, developed an expertise in lending to the rural agricultural community and are then earning a premium through the PSL certificate route.
Ensuring that agriculture and MSMEs are eligible for PSL would ensure better credit availability to MSMEs while keeping the agri-financing pipeline healthy. Though the government jurisdiction on PSL is limited, a budget announcement nudging the RBI to act towards furthering this objective would be constructive.
To conclude, let us hope that the Finance Minister rewards the patience of the people who have been hit hard by demonetisation, and ensure that the Budget 2017 makes them more financially secure.
(The views expressed in the article are personal and are endorsed neither by the institute nor the director.)