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Govt's fiscal position and what to expect from Budget 2022

Given that consumption is the main driver of our economic growth, putting more money in the hands of the individual would definitely give fillip to consumption (Photo: iStock)Premium
Given that consumption is the main driver of our economic growth, putting more money in the hands of the individual would definitely give fillip to consumption (Photo: iStock)

Important tax measures that govt could consider including in Budget 2022 are higher standard deduction for individuals, enhancing the limit on interest on home loan for individuals, and recognising the business requirement of work-from-home for unburdening the individuals

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In last year’s Budget, the finance minister announced pillars on which her proposals would rest. These were creation of physical and financial capital, speedy infrastructure development, attention to health and wellbeing, reinvigorating innovation and R&D, improving on human capital, and minimum government and maximum governance. At the time the Budget was presented, the first wave of the pandemic had already swept the country and the world, and the second pandemic wave loomed large in the not-so-distant future.

To achieve the budget objectives, the government boldly increased the budgetary outlay by 1% to 34.83 lakh crore, with capital expenditure at 15% of the budget outlay, going up by 26.8% over FY 2020-21, the first year of pandemic. Even the health and well-being spending, which also included nutrition and water supply, got a composite enhancement in allocation by 137%. All these expenditures were to be funded by the modest direct tax receipts of Rs. 11.14 crores, and indirect tax collections comprising GST, excise, and Customs duty of Rs. 11.01 lakh crores. Disinvestment proceeds of Rs.1.75 lakh crores were to augment the resource side and borrowings were to be Rs.15.06 lakh crores, higher by 27% before the pandemic year. The budget did make some bold moves particularly since the uncertainty from pandemic was high. 

In two weeks, Budget for the coming FY, 2022-23 will be presented. It is time to evaluate how we fared during the current FY. Net revenue receipts, as per the Controller General of Accounts, are at 73.5% of the estimates, and certainly more are to come, given a very buoyant GDP growth estimate. While total expenditure is at 60% of the estimates, the concern seems to be on capital expenditure which seems to be lower than expected, at less than 50% of the estimates. One can understand that given the frequent lockdowns, work on capital projects may have been erratic, and certainly not scaled by month. 

Question is also what to expect of the government for the upcoming Budget? Of course, the basic philosophy of giving push to infra and health spending should be continued, given that economic growth is expected to be still very robust. Special attention, however, should be made on job creation, on innovation and R&D along with skilling particularly in the context of National Education Policy 2021, and of course a better disinvestment programme as the current year target is likely to fall woefully short. 

The government can continue on higher infra spending; even the National Infrastructure Pipeline of 7,000 projects had envisaged higher spending in the first few years between 2020-25. Important in that would be that the states - which are to contribute 25% of Rs. 111 lakh crores - must also enhance their allocations. For that, the states may be given special financing window, such as interest-free, long-term loan, additional borrowing tied to capex, etc. Also, it would be useful to involve the private sector to augment resources and bring better technology and managerial skills. To enthuse them, government can consider bringing group taxation. This will allow infra promoters to be more viable and would thereby have more ability to undertake risky or not-so-viable projects. This change in tax laws can, however, be built with some anti-abuse provisions as has been done in Malaysia, Australia, and other countries. 

Hospitality and travel industry has suffered considerable losses during the pandemic years. They are not considered “industrial undertaking" as per the tax statute. Making changes in the direct tax to include them can help the sector’s consolidation through amalgamation and mergers and thereby get the necessary capital to spur growth, generate employment, and also pave way for possible digitisation. This will also make the sector attractive for foreign investment.

Physical and mental health is fundamental to an individual’s well-being, core to stable, cohesive society, and the government has rightly brought attention to that. Higher spending on health and proactively vaccinating people has brought everyone back on feet. It is important now that the government (this includes state governments too) brings about a fundamental reset to avoid blundering into a health crisis again, even if there is no pandemic; this otherwise has enormous human and economic costs. The current health system is fragmented. The effort should now be to enhance the delivery capacity by augmenting not only the medicine and other vital materials supplies but also personnel for the better health services delivery. Connecting all these dots through a digital platform can ensure better delivery. This will not only be useful during normal times but can also pivot swiftly to provide the medical countermeasures specific to any situation. 

Innovation and R&D is a pillar for Budget action. At present, direct tax allows 100% expend on R&D. There is a request to enhance that to 200%. While elasticity between incentive and investment (about 0.15) is low, importance for such increase is in terms of country competition that puts India at a disadvantage; 83% of East Asian countries and 76% OECD countries support R&D through tax incentive. It will thus be important to benchmark Indian incentive to these international practices so that India is not at a disadvantage. 

MSME is the backbone of any nation’s industry. It creates large number of jobs, often disproportionate to the investments. MSMEs suffered considerably during the pandemic. Some credit helps were given to them. They however seem to be still struggling. Enhancing the turnover limit for presumptive taxation can help them. Fears that they would always want to “bunch" below the allowed turnover limit, seem unfounded as the government really does not lose much (much less than Rs. 100 crores). So, creating a liberal presumptive tax regime could help them be viable and it will improve the business sentiment.   

Other important tax measures that government could consider including in the Budget are higher standard deduction for individuals, enhancing the limit on interest on home loan for individuals, and recognising the business requirement of work-from-home for unburdening the individuals. Given that consumption is the main driver of our economic growth, putting more money in the hands of the individual would definitely give fillip to consumption. One would be tempted to include GST rate rationalisation, but that is not a topic for the Union Budget.   

Sanjay Kumar is partner, Deloitte India 

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