While we Indians look with a lot of expectations at the Union Budget, there is hardly any leeway for a finance minister to do something dramatic in this budget. Let us see why.
Simply put, a budget is a sum total of revenues minus expenditures. Broadly 85 percent of the revenues come from tax and therefore this cannot change dramatically – especially in the slower growth years like that we have now. The top expenditure items like defence, subsidy and interest are quite difficult to move downwards priority wise and occupy half of the total expenditure. The remaining amount is allocated for developmental expenditure across ministries. But there too, the existing schemes of the government and administrative expenses like salaries occupy the main portion. There is a limit to which the government can exceed its expenditure over its income, which we know is the deficit. It is controlled under the FRBM (Fiscal Responsibility and Budget Management) Act and expected to be around 3 to 3.5 percent of the GDP. Against this background, budget remains more of an activity that could provide the country an idea of the government’s thought process. It can, at times, through some announcements kindle the animal spirit in the economy.
It is a well-accepted fact that the manufacturing sector is experiencing tepid growth in the current year and that is not likely to move dramatically northwards in the next three months. The slower growth in the economy is not due to supply shortage (or else we would have seen high inflation) but due to lack of demand. So what could be done on the fiscal front to spur the demand in the economy?
GST rate reduction
The reduction in GST rates could have been one option, as that would have reduced prices and pushed up the demand. Only a decade ago this was done successfully when excise duty on cars was brought down from 24 to 8 percent while that on most other products was brought down from 16 to 8 percent. That saw a tepid economic growth of 3 percent in 2008 to jump to close to 10.3 percent in 2010. Perhaps October last year could have been a good time for such an action which could have perhaps seen a revival in demand during the festive season in the third quarter. The possibility of such a reduction is very low now. In any case, that would fall under the GST Council’s agenda and Union Budget cannot decide upon it.
Personal income tax rate
Reducing the personal income tax rates can leave more cash in the hands of consumers and could be one way of boosting domestic demand which the manufacturing, and auto sector badly needs today. But would the slow GST and corporate tax growth allow the FM to make this decision? The answer is mostly in the negative unless the government is ready to brace for a high deficit. Can we then at least look at some special deductions for interest on loans for auto and consumer durables on the lines of those announced for e-vehicles last year? Most of the new cars are financed through loans and this could boost the sector which is struggling with sluggish demand, the onslaught of new technologies, newer pollution standards and increased competition et al., and it may not be a great idea to drain the government’s finances.
Customs amnesty and procedural simplification
Most of the manufacturing sector, including auto, has huge exposure to customs duties, which often results in litigation. A customs amnesty scheme on the lines of successful excise and service tax amnesty scheme which ended just a few days ago could be one way to un-strangle the industry from its pending litigation. The last few years have seen umpteen simplification measures through the budget on the customs side. However, more reforms are necessary on the ground in terms of simplification of processes, easy availability of refunds - especially scrips processed by commerce ministry like MEIS (Merchandise Exports from India scheme) and SEIS ( Service Exports from India Scheme). Schemes like AEO (Authorised Economic Operator) or manufacturing under customs bond need to be promoted and officers need to be sensitised to go out of their way to help the industry as these schemes have the potential of reducing the cost of doing business and therefore making India business competitive.
Should we look at out-of-box ideas like automatic refunds (including issuing scrips like MEIS/SEIS besides customs and GST refunds) if they are not processed within a particular time? I would believe yes. Today the government promises interest at 6 percent on delayed refunds but this promise is rarely kept, the taxpayer, however, pays interest at 18 percent on every delayed tax payment. An automatic refund will take care of this anomaly.
There may not be dramatic announcements for the auto and manufacturing sector in the budget, but the measures that would kindle the animal spirit without disturbing the fiscal balance are the need of the hour.
Waman Parkhi is Partner, Indirect Tax, at KPMG in India.
First Published: Jan 25, 2020 6:00 AM IST
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