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Conflicting Signals

Small savings provide long-term, risk-free funds for investment by the Government; a further fall in household savings could result in a resource crunch. Viewed in this perspective, the Government’s efforts to stimulate consumption by discouraging savings by small taxpayers may not be a very good idea.

Devendra Saksena | New Delhi |

The dissonance between the Budget document, Budget Speech and the Economic Survey cannot be more striking. The Budget Speech talks of increasing the ease of living which could only mean easing of financial procedures, but the Budget document has introduced a number of new complexities in the Income-tax Act. The Economic Survey suggested becoming part of the Global Value Chain, to kickstart our economy, but Budget 2020 has increased Customs Duties on a host of items, making our participation in a Global Value Chain difficult. Such anomalies abound.

We are now used to see our Prime Minister perambulating around the globe, and following in his footsteps, sundry Chief Ministers visiting myriad countries to seek foreign investment, which is touted as a panacea for our economic woes, by the Economic Surveys of the current and preceding years. Yet, when the founder of Amazon visits India and announces $1 billion investment and a million jobs, a senior cabinet minister lambasts him and no one from the Prime Minister downwards has time to meet him. When the chief of Microsoft remarked that immigrants enrich a country, which is taken as criticism of the contentious Citizenship Amendment Act, rightwing leaders go hammer and tongs at him calling him ‘literate but not educated.’

In the recent past Ministers have got into unnecessary spats with entities like WhatsApp and Facebook. Such churlish behaviour appears custom-made to antagonise business leaders and drive away investment. The Finance Minister, in her Budget speech promised to simplify the Income-tax Act by doing away with seventy exemptions. However, the Income-tax Act retains these exemptions, rather taxpayers have to decide whether they would forego these exemptions and be taxed at a lower rate or avail of exemptions and be taxed at a higher rate. This would entail engaging the services of a chartered accountant, even for small taxpayers, increasing their compliance cost.

Looking beyond the obvious, exemptions were built into the Income-tax Act for a social purpose. For example, an exemption of Rs 1,50,000 was offered on subscriptions to a Provident Fund or Life Insurance and an exemption of Rs 2,00,000 (Rs 3,50,000 on a new house) was provided on interest payments on a home loan. The purpose behind these exemptions was to encourage people to secure their future by insurance, savings and purchase of house property. Along with axing of these exemptions, a cut in the interest rate on small savings, PPF etc. also seems to be in the offing.

These steps are counter-intuitive because even otherwise the savings rate is falling consistently; at the height of India’s growth phase in 2012, the savings rate was around 36 per cent but it is now down to 30 per cent, household savings have declined from 23 per cent in 2012 to 17 per cent in 2018. Small savings provide longterm, risk-free funds for investment by the Government; a further fall in household savings could result in a resource crunch. Viewed in this perspective, the Government’s efforts to stimulate consumption by discouraging savings by small taxpayers may not be a very good idea. Additionally, exemption for medical insurance payments and exemption for the disabled have also been axed.

Thus, a host of socially useful and beneficial provisions (for the Government also) have been axed at the suggestion of some ersatz tax experts. If we consider the fact that 90 per cent of income-tax is collected from only 8,000 tax payers, these exemptions do not have any significant tax impact for the Government but are very important for small taxpayers. Since, most small taxpayers are salaried employees whose income-tax statements are checked by their Drawing and Disbursing Officers, there is not much scope for misuse of these exemptions. It may be mentioned here that under the Income- tax Act, Drawing and Disbursing Officers have been made personally responsible for the correctness of the income-tax statements of their employees.

Another contradiction in Budget 2020 is overestimation of receipts at a time when more credible statistics were promised in the Budget speech by formulating a National Policy on Official Statistics. Being more specific, according to the Budget document, for the current year Corporation Tax collection would fall to Rs 6,10,500 crore from Rs 6,63,571 crore (8.7 per cent ) of last year but in the next financial year collection would rise to Rs 6,81,000 crore, that is, an increase of 11.64 per cent. For Personal Income-tax, collection is estimated to rise by 26 per cent in this year and 14.1 per cent in the financial year 2020-21, which appear to be gross over-estimations.

The Expenditure Statement of Budget 2020, similarly, shows an unnecessarily rosy picture. For example, despite talk of doubling farm income in the next two years, allocation for agriculture has been increased only by 3 per cent ~ from Rs 1,30,485 crore in 2019-20 to Rs 1,34,400 crore in 2020-21. Significantly, according to the Revised Estimates, only an amount of Rs 1,01,904 crore would be spent on agriculture in the current year pointing to deep-rooted implementation issues. Another disturbing conclusion is that much less than the budgeted amount would be spent on agriculture if we consider both years together. Similarly, against a budget allocation of Rs.93,035 crore for health in the last Budget, according to the Revised Estimates, only Rs 71,584 crore would be spent in the current year.

Thus, an allocation of Rs.1,06,324 crore in the current Budget for health may not prove very meaningful. Budget allocation for defence has been increased by only 5.8 per cent with only a marginal increase in capital outlay, which may be insufficient to fund the ambitious acquisitions in the pipeline. Budget 2019 promised a slew of incentives for promotion of electric vehicles. Budget 2020, presented within six months of Budget 2019, increases the import duty on electric vehicles and components of electric vehicles. Similarly, Section 80EEB, introduced in Budget 2019, providing a deduction of Rs.1,50,000 on interest paid for purchase of electric vehicles is among the exemptions being axed by Budget 2020.

The Government claims to favour small taxpayers and senior citizens but not much has been done for them by the Finance Minister. In a display of off-Budget largesse, on 20 September the FM reduced the corporate tax rate to 22 per cent + surcharge + cess (in aggregate 25.2 per cent), for those corporates that were willing to give up all other exemptions and incentives. Further, manufacturing companies set up after 1 October 2019 were to be taxed at a flat rate of 15 per cent + surcharge + cess (in aggregate 17.1 per cent), provided they give up all other exemptions and incentives.

Budget 2020 extended this largesse to newly set up power generation companies. However, most small businesses which are proprietary in nature or are constituted as firms, continue to pay tax at the old rates, that is, firms are taxed at a flat rate of 30 per cent while proprietary businesses have to pay tax at 30 per cent should their income exceed Rs.10 lakh. One may point out that the total number of corporate taxpayers is less than 8,50,000 and corporates provide employment to less than 20 per cent of the industrial workforce. As opposed to corporates, firms and proprietary businesses taken together, number more than 5 crore and employ 80 per cent of the workforce.

One can safely say that there would have been a surge in spending and employment if similar tax cuts had been given to non-corporate taxpayers in the current Budget. The Government is not willing to innovate. Given the adverse Sino-US trade relations, many MNCs are shifting their manufacturing base to other Asian countries. Countries like Vietnam have been able to lure a significant number of these countries while the benefit to India has been infinitesimal because not much has been done to create a suitable environment for new companies to start manufacturing in India, despite our ‘Make in India’ programme.

One may add that our corporate tax rate of 17.1 per cent compares favourably with that of other Asian countries and if tax rates were the sole criteria for investment then we would have been able to divert the investment meant for most other countries to our shores. With the Global economic scenario changing by the minute, we have to think on our feet and grab opportunities as they come.

Shakespeare aptly wrote: There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune. (Julius Caesar)

(The writer is a retired Principal Chief Commissioner of Income-Tax)