Union Budget: FM must focus on incentivising economic activities, widening tax base

The World Bank in its latest Global Economic Prospects (GEP) report forecast that global recovery will sharply decelerate in the wake of continued COVID-19 resurgences, lesser policy support and persisting supply bottlenecks.

| View: Infrastructure sector- Expectations from 'Union Budget 2022'

This is reflected in India too. As per the CSO’s estimates, India’s GDP is expected to grow by 9.2 percent in FY22 as indicated in their first advance estimate for the year. This high reading of growth can primarily be credited to the low base (of -7.3 percent) in FY21. The CSO’s GDP growth estimate is lower than the 11% projected in the Economic Survey and 9.5 percent estimate of RBI.

In December ’21, the pace of headline inflation (CPI) accelerated to 5.6 percent, 68 basis points (bps) higher over 4.9 percent in the previous month. The retail inflation rose driven by a rise in food inflation.

As per the household survey of the Centre for Monitoring Indian Economy (CMIE), the labour participation rate turned up to 40.9 percent in December. An industry-wise analysis by the CMIE indicates that jobs were lost in manufacturing, hotels, tourism, and education, while more jobs were created in construction, agriculture and retail trade.

The issuance of E-way bills -- an indicator of freight movement -- increased to 7.2 crore in December, the second highest in its history. This would suggest robust GST revenue in January 2022.

The fiscal position of the Union government continued to post improvement. Net tax revenues touched an all-time high of 73.5 percent of budget estimates (BE). The gross fiscal deficit came down to 46.2 percent of BE during April-November 2021, as against the five-year average of 50.6 percent.

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Collections under GST posted a YoY growth of 12.7 percent in December 2021. In Q3FY22, the highest quarterly GST collections of Rs 3.9 lakh crore were recorded.

An RBI state of the economy report mentions improvement in state finances with revenues surpassing pre-pandemic levels. States’ tax and non-tax receipts recorded a YoY growth of 29.2 percent and 53.8 percent, respectively, during April-November 2021.

India’s merchandise exports touched an all-time high of $37.8 billion, recording a sequential improvement of 25.9 percent in December; 75 percent of the target set for 2021-22 has been achieved.

Merchandise imports rose to their highest level of $59.5 billion in December 2021, indicating a strong domestic demand. Trade deficit eased to $21.7 billion in December 2021. On a quarterly basis, the trade deficit reached a record level of $62.4 billion during Q3FY22. Foreign exchange reserves stood at $632.7 billion in mid-January 2022, providing a cover equivalent to 13 months of imports.

And to this mix we have Omicron casting its shadow creating uncertainty and impacting several areas of the economy. Under these circumstances, the budget necessarily has to focus on incentivising economic activities. Social sectors will see an increase in expenditure. Public infrastructure will be another area of focus. The scope of PLI schemes could be increased. Part B of the Union Budget dealing with tax proposals to meet these challenges will be the key. The overall arching concern both on the indirect tax side as well as the direct tax side will be to widen the tax base, improve compliance and reduce litigation.

On the Customs side, with Atmanirbharta being the mantra there will be pressure on increasing tariffs. As Arvind Subramanian and Josh Felman have pointed out in their article published recently in Foreign Affairs, there have been some 3,200 tariff increases since 2014; 70 percent of total imports have been impacted. India’s tariff barriers have increased from 13 percent to nearly 18 percent.

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The finance minister should not succumb to the demand for increasing customs tariffs. This is more so in the backdrop of the multi-pronged efforts to enter FTAs with a host of countries -- where tariff reduction is a given. So, at best a review of the various rates should be done-and where necessary reduced. Gold is one such commodity. The present tariff rate encourages smuggling with all its attendant problems.

The previous budget had mentioned an ongoing exercise of rationalisation of customs exemptions. Nearly 80 exemptions were withdrawn. At least 400 more were up for review and hopefully some will cease to exist.

On the GST side all decision making is with the GST Council. The report of the GoM on the issue of inverted duty structure and rate rationalisation is still awaited. Amendments in the GST law as recommended by the GST Council could figure in the Budget. This could include the GST return format, levy of interest only upon utilisation of ITC, credit accumulation utilisation among others.

Petroleum products continue to be outside the fold of GST. There should be no increase in central excise duty on petroleum products. This is more so since the price of crude is in the region of $86.

The Commerce Ministry has been mentioning of simplification of SEZ scheme. There are issues regarding SEZ sale to DTA which need closure. Exports should be supported.

The Finance Minister has an unenviable task.