With the union budget exercise gathering momentum and Finance Minister facing the worst of challenges of presenting budget in the backdrop of economic disaster caused by Covid, the hope of an economic turnaround continues in the mind of every Indian.   Few suggestions for the consideration of Finance Minister as follows : –

1. Cess / Surcharge

  • NDA governments have carried a track record of raising taxes by enhancing the rates of surcharge and cess while philosophically endorsing the proven merits of reducing taxes and not touching the basic structure to collect more revenue. Newspaper reports have already been indicating a serious possibility of additional covid cess in coming budget.    Last year, the Finance Minister claimed big kudos for reducing basic rates for specified corporate tax payers with the objectives of:

√ Competitiveness of economy with one of lowest tax rates in the world

√ Attracting foreign investments

√ Improving manufacturing base of the country

√ Ease of doing business.

  • However, such tax rates comparisons are colored, unless aggregated for the overall effective rates of taxes. Collection of tax through surcharges and cess has hovered around 6.7% of Gross Tax Revenue uptil 2012-13 generating appx 73000 crores which has now risen to upwards of 1,75,000 crores as per the budget estimates for current financial year. On an average this signifies an abnormal growth of 150 per cent compared to the previously prevailing average levels and the revised ratio of surcharge / cess to gross tax revenue since 2016-17 is upwards of 10%.
  • Incidentally, India had no surcharge between 1946 and 1950 and C.D. Deshmukh introduced surcharge in 1951-52 which after years of debate, recommendation of several committees, finance commission got abolished has since continued barring 1998-99 when surcharge was completely done away with. Understandably, this remains an extremely attractive and easy source of raising revenue for the Central Government being indivisible as well as managing the optics of maintaining lower basic rates for sake of stability as well as a progressive outlook.   Legal debates and controversies have also surrounded inter-alia adverse remarks of CAG on opaqueness around utilization of collection from earmarked taxes.  For instance, Mumbai High Court sometime back allowed deductibility of chess as Business Expenditure in case of Sesa Goa and final view of Supreme Court is awaited.
  • Even the World Bank has recommended that earmarked taxes work best when the immediate beneficiary contributes towards the tax which incidentally is not the case in India. Similarly, example of several countries ranging from USA, France, UK, Germany, Australia carry a similarity of approach on the legitimacy and duration of earmarked taxes.
  • For the sake of establishing probity to attracting investments, strengthen transparency, governance and commitment to pursuing agreed tax reforms, it merits serious consideration to abolish or at least cap the revenues from surcharges / cess not to exceed more than 5% of gross tax revenue.

2. Cost economics of Agriculture output

  • The statement showing the computation of loss of tax on account of various exemptions and dispensations as an addendum to the budget has never taken into account the approximate loss of tax revenue on account of exemption granted to income from agriculture. Appx reported GDP of agriculture is around 19 lac cr constituting nearly one fifth of total GDP.
  • However, the expenditure budget allocates nearly 3.3 lac cr comprising of food & fertilizer subsidy, Kisan welfare schemes etc. Agriculture expenditure budgeted by various States to accommodate loan waivers, free electricity and localized programs, one can add another 15% to Centre’s budget of 3.3 lac crore to arrive at an approximate cost of 4 lac crore.
  • Assuming a quarter of the agriculture income were to be taxed @ 33%, then total cost of generating 19 lac cr of agriculture income adds up to Rs 1.5 lac crores.
  • The abnormality of expenditure (5.5 lac cr) on agriculture vis a vis the agriculture output (19 lac cr) is self-explanatory and raises serious concerns on effective cost economics of our agriculture produce. Request the Finance Minister to evaluate the rationalization of expenditure under this head to provide room for economic growth and eliminate wastage / misappropriation, if any.
  • Abuse of income tax dispensation to agriculture income is another area which needs serious attention. Agriculture income as per income tax records is understandably several times the actual agriculture income of India.   This needs a white paper for working effective steps to curb tax avoidance and abusing the exemption.
  • Lastly, income tax act needs overhauling by doing away with outdated provisions of taxing notional incomes and taxing perks on motor car usage etc. in line with the modern times. Covid has impacted the salaried class  the most and as a special one-time dispensation to help large number  of people losing their jobs, exemption for house rent allowance should be given for the rent paid for the entire financial year instead of restricting to the period of salary income only.

3. Gross capital formation

Gross capital formation (formerly gross domestic investment) as percentage to GDP has gone below 29 per cent in 2019 ( pre covid) and it had averaged around 35% till 2013.   This compels the need for an immediate boosting of economic growth and increasing the rate of gross capital formation by boosting domestic savings and promoting a climate for industrial growth.  With enough room created post standoff with China to boost domestic manufacturing, now road is getting ready for higher capital investments.     It is important to evaluate the currently prevailing anomaly of lower rates of interest and higher rate of inflation.   On the top of that the interest income is subjected to taxation which effectively results in continuous erosion of principal value of deposits held with commercial banks.  Our banking system has already been plagued with high proportion of non-performing assets and can ill afford any potential flight of deposits for want of better economics.  An immediate attention is needed to at least raise the minimum dispensation for interest earned in banking deposits of every kind to at least one lac fifty thousand per annum.

4. Income from Salary

Finance Ministers have gone on record with respect to higher effective incidence of taxation on the salaried class with tax deduction at source by the employer and having to pay tax on entire income except marginal reliefs of modest standard deduction and few deductions subjected to savings etc.  In the last budget, estimates for personal taxation were raised with increase in surcharge and possibility of expanding the individual tax base.   However, long pending need to reformulate the taxation of salaries in line with modern trends of CTC structures of compensation remains unaddressed.  After paying GST with heavy cess and registration charges etc, it makes very little sense to also value perquisite as per the age old system when total number of motor cars were very handful.  It makes imminent sense to do away with the perquisite taxation of motor car and similar mundane provisions.   Massive job losses faced by salaried class also deserves a special consideration of availing deduction for paying rent even for the period of no salary income at least for the current financial year.

5.Balancing the economic growth and fiscal challenge

Growing demand for defence expenditure, imminent shortfall in projections for revenue collections and demand to provide stimulus to restart the economic growth poses a herculean challenge before the budget makers.   While a larger fiscal deficit maybe inevitable, it would make ample sense to shift focus to raising higher non fiscal revenue.   Apart from expediting disinvestment in PSUs, additional suggestions inter-alia few out of box ideas for raising financial resources are as follows : –

i. Evaluate the possibility of zero coupon Covid Bond with a duration of Ten years and the redemption price be linked to incremental economic growth over the base period of 20-21. This would mean no burden of interest provision and incentivize economic growth to service the bond maturity.

ii. Mandatory transfer of fifty thousand rupees from the savings account held with banks maintaining a balance of over five lacs for the last 24 months to a Covid bond of 3 years. Banks should be allowed to lend against the covid bond to the depositor at the rate of interest of saving bank.   This would generate large funds for the government without any need to levy a Covid cess and carry acceptance of general public.

iii. Reduce capital expenditure allocation requests from PSUs slated for disinvestment, stake dilution and decontrol. Last year PSU capital expenditure was 6.7 lac crores and a fifty percent reduction equates of generating 3 lac cr which would be helpful in bridging the likely shortfall of 4 lac crore in direct tax collection in current financial year.

iv. Cut the expenditure on Agriculture which has gone up nearly thirty five percent plus post 2019. Cost economics of agriculture need serious consideration to constructively correct the imbalance of expenditure.

v. Convert a portion of annualized pension liability to special bond against which loan can be taken on subsidized rates of interest. This will help cut the fiscal deficit and contain the interest cost which remains one of the single largest concerns of rising fiscal deficit.

To sum up Indian citizens, foreign investors and institutions carry high expectations hovering around serious reforms and impactful long term economy friendly announcements from this budget. I do hope that FM will Think Big and Act Bold to make the Budget Beautiful for paving an economic growth…..

Author Bio

Qualification: CA in Job / Business
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Location: gurgaon, Haryana, IN
Member Since: 18 Jan 2021 | Total Posts: 1

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5 Comments

  1. G. R. Bhatia says:

    Well articulated and comprehensively dealt with all relevant aspects and hopefully Government will accede to suggestions given by author.

  2. CA. BISWAJIT BASU says:

    In my opinion, it will be a foolish job to extend any sort of suggestion to the Ministry of Finance regarding this forthcoming Budget. As we all know, all ministries so far, whatever party be in charge thereof, have always turned a deaf ear to the suggestions given by the Professional bodies, even a common people. Experience says that whatever the Ministry does, it is done keeping in view the benefit of the Government, whether it be Central or State, and also the benefits of peoples’ representative, say MPs or MLAs. So it will be simply a wastage of time and energy to think of the new suggestion and extension of the same to the Government Authorities. In support of my claim I can mention the affairs of CPC is still not controlled or taken care of by the Ministry of Finance and the mental torture is effect by them regularly, through the various wrongful acts of CPC. So Please don’t waste your time and energy

  3. G B Gbshale says:

    My only suggestion s for budget is in regards to the income tax that
    Simplyfy the entire system remove the provisions which creates tha dispur remove entire deductions and exemptions and introduse tax holiday benifit to certain zones and industries for developments and which create employment and growth for the nation’s also give ravages in tax to class of people’s to encourage the abilities and qualies.
    Specially in regards the capital gain tax it should be very simple that upto certain limit of transaction in immovable asset no tax and then after tax at low rate shall be collected on entire amount of transaction and collected at source.
    Tax rate should be very low and collected at source at tha time of receipt itself.

  4. Sangamesh Yelamali says:

    Government should give priority in railway, airline bookings, entry to airport, etc. for tax payers for tax payers. This will not cost the exchequer but will be an incentive to make people to comply and be honest tax payers.

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