23 Feb 2016 20:09 IST

An opportunity to stimulate the economy

Time to incentivise voluntary disclosure, align service tax to GST and speed up disinvestment

In spite of the global economic slowdown, the present situation presents a wonderful opportunity for India to register higher economic growth, considering it boasts of a massive domestic demand base. Experts have said India must ideally grow at over 8 per cent to realise its full potential.

With the RBI laying down a base for growth with multiple rounds of rate cuts, it boils down to the fiscal policy laid down by Arun Jaitley to stimulate demand in the economy. Public expenditure in this regard is an absolute necessity, given the leveraged balance sheet of private players. And the public expenditure has to be backed by a considerable revenue base that keeps fiscal deficits within acceptable limits (around 4 per cent of GDP).

Direct taxes

The phased reduction of corporate income tax from 30 per cent to 25 per cent should materialise starting this fiscal. There is also scope for increasing the deduction under Section 80C, which will serve the purpose of channeling savings into the economy. Tangible actions need to be implemented to remove the notion that India is promoting ‘tax terrorism’.

The Black Money Act, introduced in the previous fiscal, is an interesting case in point. Although the voluntary disclosure mechanism was put in place, it was not a huge success, due to a limited number and amount of disclosures. Although it might not seem a popular or moral measure, there should be another window opened for voluntary disclosure, with income thus disclosed chargeable to tax at 30 per cent rather than the current punitive 60 per cent. This is very important to channel black money into the mainstream economy, though it might seem unfair to many of the parties concerned.

Indirect taxes

With the rollout of GST now being a question of ‘when’ rather than ‘whether’, the government can take this opportunity to spur revenue. With the GST rate tentatively proposed at 18 per cent, the government can increase the current effective rate of service tax to align it to the imminent GST rate. Experts see a potential increase of 2 per cent in the service tax rate.

Disinvestment

The underlying theme of the last Budget (and hopefully the next one) is more governance and less government. Disinvestment is an important step in this regard. It is also a huge source of revenue for the government to fund its capital commitments. In FY16, the government had set a disinvestment target of ₹70,000 crore; however, the actual collection materialised to a mere ₹12,500 cr.

The disinvestment target was not met because of depressed stock prices, as most of the companies proposed to be disinvested were commodity-based entities. Given that the country’s economic prospects are not too optimistic, the disinvestment target should be set more realistically this time to fund the increased infrastructure requirements.

The expectations from the upcoming Budget are not radical; they are about doing the existing things right, or better. The entire framework for stimulating the Indian growth story is well in place, and the Budget should strive to ensure a better environment for its implementation.

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