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Business News/ Budget 2019 / Budget Expectations/  Deepen and widen direct tax net to boost economy
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Deepen and widen direct tax net to boost economy

The journey to $5 trillion will need the fuel of higher tax, heavier infrastructure spending, increased private consumption and greater private sector investments

Not much is expected in the direct tax space since the big change of making taxable incomes below ₹5 lakh tax-free happened in the interim budget in February 2019 (Photo: iStock)Premium
Not much is expected in the direct tax space since the big change of making taxable incomes below 5 lakh tax-free happened in the interim budget in February 2019 (Photo: iStock)

Tax revenue forms the fuel that drives the spending of a government. Security, courts, regulators, infrastructure, utilities and a host of business, enterprise, labour, consumer and investor enablers are funded by the government using this tax revenue. As citizens, we want the classic retail investor deal—highest return for no risk—or the highest level of government services at no tax, or lowest possible tax. But the journey to a $5 trillion economy, an audacious growth target of over 12% a year, will not happen without deep change in who pays how much tax and how the government removes the various arbitrages from within the tax system.

The budget exercise has today become more about the direct tax proposals and about how the government is planning its spending because the entire indirect tax piece is now decided by the GST Council. Not much is expected in the direct tax space since the big change of making taxable incomes below 5 lakh tax-free happened in the interim budget in February 2019. As taxpayers, we should expect more measures to get a wider tax net rather than higher tax rates on incomes this budget. Other trillion-dollar economies have similar tax-to-GDP ratios as India, of around 11%, but their direct taxes account for a higher share. Direct taxes in the US account for four-fifths of the total tax revenue as compared to just half in India. This, of course, is linked to formalization of the economy, where just one-fifth of India’s labour comes from the organized sector, while less than 7% of the US labour force is in the informal sector. Expect more measures to increase formalization of the economy and a deeper and wider tax net.

While this is the expected larger canvas of the budget, the actual proposals will attempt to manifest this story. The budget may attempt to blend in the investor expectation of rationalizing the long-term capital gains on equity. Introduced in Budget 2018, this tax has caused some distress in the investing community that is a part of the over 2 trillion market cap Indian stock market. This is linked to a broader expectation of removing the arbitrage between products, definitions and rates of capital gains from assets. Indian tax law defines short- and long-term differently for different asset classes. Equity goes long term after a holding period of one year, real estate after two years and debt after three years. Investors expect the budget to remove this arbitrage. Tax rates too are different for different asset classes and must be rationalized. The free pass given to investments when done through the insurance route needs to go. The reward for buying a tiny (and useless) crust of a life cover, is a zero tax status on their returns from both equity and debt. This skews investor choices towards a more expensive, opaque and less efficient product. The different rules for switching investments, too, are expected to be changed. For example, real estate profits can be switched to another property within two years to get a zero tax status. Switches in different parts of the market have different tax rules—this too needs a change.

It is expected that the budget will raise the 1.5 lakh Section 80C limit. This is the tax deduction an investor gets for putting money in products out of a defined basket. Provident fund, PPF, life insurance premiums and equity-linked savings schemes (ELSS) are a part of this basket, among others. This limit has stayed static for five years. To fund infrastructure, there is an expectation of tax-friendly, long-term special infra funds either directly through retail or the institutional route.

The budget is likely to crank start a slowing economy by increasing its spending. Households need not worry about higher tax rates, but should not expect any concession in the already reasonable tax rates and slabs. The journey to $5 trillion will need the fuel of increased taxes, heavier infrastructure spending, increased private consumption and greater private sector investments. It will need an environment of greater trust between the business and government. And the money flows have to begin to fund the short- and long-term needs of business.

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Published: 03 Jul 2019, 05:57 PM IST
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