let s continue life the way we live

Transcription

1 Union Budget 2017 It says let s continue life the way we live For years IE has been lamenting over the incredibly small percentage of population filing income tax returns and fewer still paying personal income tax. It is something sad: for a population of 126 crore, just a little over a crore should pay income tax. We have also been contrasting this with the visible signs of prosperity in terms of the boom in the sales of automobiles, housing property, foreign travel, etc. We have been suggesting progressive targeting to take IT payees to at least 30 per cent of the population over three years. S Viswanathan 8 industrial economist february 2017

2 cover story A tax non-compliance society... We are happy over the emphasis made by Finance Minister Arun Jaitley on expanding the income tax base and correspondingly correcting the very low tax-gdp ratio. Look his graphic description: As against estimated 4.2 crore persons engaged in organised sector employment, the number of individuals filing return for salary income are only 1.74 crore. As against 5.6 crore informal sector individual enterprises and firms doing small business in India, the number of returns filed by this category is only 1.81 crore. Out of the lakh companies registered in India up to 31 March 2014, 5.97 lakh companies have filed their returns for Assessment Year. Of these, as many as 2.76 lakh companies have shown losses or zero income lakh companies have shown profit before tax of less than Rs 1 crore. Only 7781 companies have profit before tax of more than Rs 10 crore. Among the 3.7 crore individuals who filed the tax returns in , 99 lakh show income below the exemption limit of Rs 2.5 lakh p.a., 1.95 crore show income between Rs 2.5 lakh and Rs 5 lakh, 52 lakh show income between Rs 5 lakh and Rs 10 lakh and only 24 lakh people show income above Rs 10 lakh. Of the 76 lakh individual assessees who declare income above Rs 5 lakh, 56 lakh are in the salaried class. The number of people showing income more than Rs 50 lakh in the entire country is only 1.72 lakh. We can contrast this with the fact that in the last five years, more than 1.25 crore cars have been sold and number of Indian citizens who flew abroad, either for business or tourism, was 2 crore in From these figures we can conclude that we are a tax non-compliant society. The predominance of cash in the economy makes it possible for people to evade their taxes. When too many people evade taxes, the burden of their share falls on those who are honest and compliant. A wonderful data analytics! Eradicating black money... The NDA government has been attempting to eradicate the menace of black money. Demonetisation is among the efforts continued in this direction. Digital technology now available, would help in keeping track of the old Rs 500 and Rs 1000 notes deposited into banks. The Finance Minister referred to around 18 lakh such deposits showing unusually large amounts: deposits of more than Rs 80 lakh were made in 1.48 lakh accounts with average deposit size of Rs 3.31 crore. Such large deposits will be scrutinised. The Finance Minister expressed the hope that this mine of data will help expand the tax net as well as increase the revenues. Revenues buoyant and deficit to target Jaitley has the reason to feel happy over fiscal performance through the current year that helped conform to the fiscal deficit targeted at 3.5 per cent of GDP. The bonanza of low crude and petroleum product prices and the prudent upward revision of excise duties on products, helped record a huge jump in excise duty collections, of around Rs 99,000 crore, over the previous year. Due to sluggish growth in manufacturing, estimate of corporation tax, customs and service tax growth has been modest but income tax revenue is estimated to grow around a healthy 25 per cent. My government has taken bold decisions in the interest of the poor Highlights of President Pranab Mukherjee s address to both Houses of Parliament on the first day of Budget Session 2017 To combat the evils of black money, corruption and terror financing, the government demonetised ` 500, 1000 notes Resilience demonstrated by our countrymen, particularly the poor, in the fight against black money and corruption is remarkable Close to 13 crore poor have been covered under various social security schemes Over 20 lakh youth have benefited from the PM Kaushal Vikas Yojna By the end of 2017, all meter gauge tracks in the north-eastern states will be converted to broad gauge Decisive steps taken to give a fitting reply to the repeated incursions on our territorial sovereignty Forces successfully conducted surgical strike to prevent infiltration by terrorists Constructive debate is welcome to hold Lok Sabha and Assembly polls together Ratifying of Paris agreement is a strong message of India s commitment to combating climate change Implementation of the 7th Pay Commission has benefited 50 lakh employees and 35 lakh pensioners industrial economist february

3 STORY The survey presents the economists perception of how the country has performed and how it intends to head forward. in pictures... without comment Survey Highlights The concept of Universal Basic Income (UBI) can be an alternative to the various social welfare schemes in an effort to reduce poverty Adverse impact of demonetisation on GDP growth will be transitional Gross Domestic Product (GDP) growth in to dip to around 6.5%, down from 7.6% in last fiscal growth to rebound to 6.75 to 7.5% in Fiscal windfall expected from Pradhan Mantri Garib Kalyan Yojana and low oil prices Farm sector to grow at 4.1% in the current fiscal, up from 1.2% in Fiscal gains from Goods and Services Tax (GST) will take time to realise Growth rate of industrial sector estimated to moderate at 5.2% in from 7.4% last fiscal The current account deficit narrowed in the first half of to 0.3% of GDP So is there one number that tells us whether we have done well or not. That number is the growth in the GDP, an indicator of the wealth created during the year. GDP Growth Constant Prices *Provisional **1st Advance Estimates % * ** Expected Range But is GDP the polestar for the economy. For sure, no. How then does the economy stack up. State of the Indian Economy GDP Growth At Constant Prices *Provisional **1st Advance Estimates * '13-14 '14-15 '15-16 '16-17 '17-18 Inflation CPI Headline WPI Headline 5.1 *Provisional Fiscal Deficit (Per Cent of GDP) *Budget Estimates ** Expected Q1 Q2 Q3 Q4 Q1 Q2 Q3* Industrial Growth Growth Rate of GVA at Basic Prices * Provisional ** 1st Advance Estimates 7.4 * ** '13-14 '14-15 '15-16 '16-17 Agriculture, Forestry & Fishing Growth Rate of GVA at Basic Prices * Provisional ** 1st Advance Estimates ** 1.2 * -0.2 '13-14 '14-15 '15-16 '16-17 Services * Growth Rate of GVA at Basic Prices * Provisional ** 1st Advance Estimates * 8.8 ** 7.8 A quick listing of the key budget numbers to understand which way the country is planned to go. Union Budget Highlights Income tax on annual income of `2.5 lakhs to `5 Lakhs reduced from 10% to 5% Income tax surcharge of 10% on annual income of ` 50 lakhs to ` 1 crore MSMEs with turnover less than ` 50 crores will pay 5% less tax; effective rate to be 25% ` 1.31 lakh crores for Railways; 3,500 kms new lines to be laid Fiscal Deficit estimated at 3.2% for and 3% for Current Account Deficit stood at 0.3% in the first half of Customs and excise duties lowered for renewable energy sector Foreign Investment Promotion Board to be phased out ` 10 lakh crore credit target for agricultural sector during Major thrust on digitisation; cash transactions over ` 3 lakh not to be allowed FDI Investments in the first half of touched ` 1.45 lakh crores Limit of cash donations to political parties brought down to ` 2000 Senior citizens guaranteed to get 8% return as pension for 10 years under a new LIC scheme No service charge on IRCTC Ticket booking Total Expenditure estimated at ` lakh crores Defence expenditure pegged at ` 2.74 lakh crores excluding pension '13-14 '14-15 '15-16 '16-17 '13-14 '14-15 '15-16 ' Source: Survey industrial economist february 2017

4 cover story Rupee comes from Key numbers that you should know Budget Snapshot Actuals Revenue Receipts 11,95,025 Capital Receipts 5,95,748 Total Receipts 17,90,783 Scheme Expenditure 7,25,114 Other than Scheme Expenditure 10,65,669 Total Expenditure 17,90,783 Revenue Deficit 3,42,736 Effective Revenue Deficit Fiscal Deficit Primary Deficit Source: Budget documents Union Budget ,10,982 5,32,791 91, Budget Estimates 13,77,022 6,01,038 19,78,060 8,01, Key Numbers (Figures in ` crore) Revised Estimates 14,23,562 5,90,845 20,14,407 8,69,847 11,76,094 11,44,560 19,78,060 20,14,407 3,54,015 3,10,998 1,87,175 5,33,904 41,234 1,39,526 5,34,274 51,205 Look at it closely for deep insight! Budget Estimates 15,15,771 6,30,964 21,46,735 9,45,078 12,01,657 21,46,735 3,21,163 1,25,813 5,46,532 23,454 Rupee goes to Tax Collection (Actuals) (Budget Estimates) (Revised Estimates) (Budget Estimates) Gross Tax Revenue Income Tax 14,55,648 Customs 2,10,338 How we are going wrong 16,30,888 2,30,000 17,03,243 2,17,000 19,11,579 2,45,000 2,87,637 3,53,174 Source: Budget documents 3,53,174 4,41,255 Union Excise Duties 2,88,073 Deficit Trends As per cent of GDP Fiscal *Revised Estimates **Budget Estimates 3,18, '15 3,87,369 4,06, Effective Revenue Primary '16 Who is giving us the money Corporation Tax 4,53,228 4,93,924 Service tax 2,11,414 '17* 2,31, Revenue '18** ` crore 4,93,923 2,47,500 5,38,745 2,75, Rupee comes from 1 Borrowings and Other Liabilities: 19p 2 Corporation Tax: 19p 3 Income Tax: 16p 4 Customs: 9p 5 Union Excise Duties: 14p 6 Service Tax & Other Taxes: 10p 7 Non-Tax Revenue: 10p 8 Non-Debt Capital Receipts: 3p Rupee goes to 1 Centrally Sponsored Scheme: 10p 2 Central Sector Scheme: 11p 3 Interest Payments: 18p 4 Defence: 9p 5 Subsidies: 10p 6 Finance Commission and Other Transfers: 5p 7 States' Share of Taxes & Duties: 24p 8 Other Expenditure: 13p Source: Budget documents Who is affected by the budget Budget Impact A look at what is dearer and what is more affordable after the Union Budget Cheaper Costlier Online rail tickets Water purifiers Liquified Natural Gas Solar panels Clean energy generating systems Leather products Cashless transaction devices Group insurance for Defence services Cigarettes and tobacco products LED lamps Cashew nuts Aluminum products Optical fibres Silver coins Mobile phones industrial economist february

5 Disinvestment receives focus... Yet another matter for satisfaction relates to disinvestment. The NDA I government under Vajpayee made a mark in phasing out a number of public sector undertakings that were not viable or incurring losses. Disinvestment suffered during UPA I. It didn t recover much under UPA II. The Modi government, with its comfortable majority in the Lok Sabha, has been endeavouring to return to this plan. The NITI Aayog has recommended the closure of several sick PSUs and also to privatise a few others. The Finance Minister pointed to the plan to list the five public sector general insurance companies. Under SEBI norms these well-established and profit-making companies are poised to off load 26 per cent of equity. This would mean a big surge in revenues of these well-established profit-making companies. Jaitley said the listing of public sector enterprises will foster greater public accountability and unlock the true value of these. He pointed to a revised mechanism and procedure to ensure time-bound listing of identified CPSEs on stock exchanges. The shares of railway PSEs like IRCTC, IRFC and IRCON will be listed, he said. A mega corporation for India s oil sector The Finance Minister has proposed to merge the public sector oil companies (ONGC, IndianOil, HPCL, BPCL...) to create a mega corporation. This will be valued around $100 billion, double that of Reliance Industries. At this size, it can rank with major global corporations and can have enormous clout in acquiring oil businesses across the globe as also to negotiate the best terms in the oil market. There had been a few attempts in the past, but they were not overtly successful. S V S Raghavan, who headed with distinction State Trading Corporation and MMTC, attempted a merger of these two. He planned to develop counter-trade business on the lines of Japanese sogasoshas like Summitomo to buy and sell goods across nations. The combined entity was named Bharat Business International Ltd. (BBIL). With the change in government in 1991, and with the different focus on globalisation and liberalisation, this concept was given up. Later, Air-India was merged with Indian Airlines. Sadly, years later the merged entity is still mired in huge losses: it is still battling with the homogenisation of the two different work cultures, systems, employee compensation... For the new concept also, homogenising the work cultures, systems and disciplines of the oil explorer and producer, the refiner and the marketeer could pose serious challenges. In the post-1973 oil crisis, international oil majors overtook the traditional auto giants and reached the top of the global corporate table. The mega merger proposed will push India in global corporate rankings. There are bright prospects for such disinvestment of public sector banks and several other profit-making PSUs as well. From Rs 45,000 crore expected in the current fiscal, a big step up to Rs 72,000 crore has been targetted for disinvestment in. SME companies receive tax relief The Finance Minister has stepped up investments substantially in the agriculture and rural sectors, infrastructure, education and skills development and on several other social welfare projects. This comfort has also enabled him to provide substantial relief to small and medium enterprises. In his previous budget Jaitley announced the formation of the MUDRA Bank to assist SMEs. Continuing with this and appreciating the huge employment and production provided by these enterprises, the budget offers a reduction in corporate tax. There is sound logic in this: SMEs do not get many exemptions. They end up paying more taxes as compared to large companies. As per data of Financial Year , 2.85 lakh companies making profit of less than Rs 1 crore, paid effective tax rate of per cent while 298 companies making profit above of Rs 500 crore, paid effective tax rate of per cent, Jaitely pointed out. And so, the Finance Minister proposed to reduce the income tax for SME companies with annual turnover up to Rs 50 crore to 25 per cent. This would benefit 96 per cent of registered companies. The budget also acknowledged a strong demand for abolition of minimum alternate tax. In order to allow companies to use MAT credit in future years, the budget proposed to allow carry forward of MAT up to 15 years. Thrust on surface transport... The merger of the railway budget into the general budget seems to have been done with ease. The focus is on building an effective multi modal logistics and transport sector that would make the economy more competitive, said the Finance Minister. The budget provides Rs 241,387 crore for the transportation sector. Of these the railways will account for Rs 131,000 crore. Passenger safety will receive special attention through the creation of a special agency with a corpus of Rs 1 lakh crore over the next five years. New railway lines of 3500 km are to be commissioned next year. Combined with the sizeable expansion of highways and road network, inland waterways and port development, surface transport is poised for well-integrated development. Likewise, select airports are to be taken up for operation and maintenance in the PPP mode. 12 industrial economist february 2017

6 Survey So rich, so comprehensive... Dr T.K. JAYARAMAN Professor Jayaraman teaches at Fiji National University. Long lingering concerns on the economy relate to the falling rate of investment; rising stock of public debt and consequent debt servicing which increasingly eats up the revenues, leaving less for investment; the ever growing proportion of NPA to total loans in the banking sector is another drag in the economy. The Survey acknowledged that demonetisation led to a temporary slowdown in GDP as cash-intensive sectors such as agriculture, real estate and jewelry were affected more than others. Further, because of the rising uncertainty, firms and households postponed investment decisions, aside from cutting consumption, which is 60 per cent of GDP. The Survey revised downwards the official growth rate for to 7.1 per cent. For also the growth rate is revised downwards: it will be in the range of 6.75 per cent to 7.5 per cent. The IMF forecast is 7.2 per cent. Fiscal deficit... The Survey asserts that countercyclical measures (fiscal deficits during recession and fiscal surplus in good times) adopted by advanced nations are not applicable to India and the focus should be on containing debt. It is not clear whether because of RBI s advice against bigger fiscal deficit in the wake of rising oil price and high inflationary potential, the Survey shifted gears from deficit to public debt. Banking woes... The non-performing loans or assets (NPA) of banks are 12 per cent of gross advances. The Survey urges to solve the problem since the consequent squeeze of banks has led them to slow credit growth to crucial sectorsespecially to industry and medium and small scale enterprises. The Survey suggests a centralized Public Sector Asset Rehabilitation Agency (PARA) to look at the largest, most difficult cases, and make politically tough decisions to reduce debt. Regional inequality... The Survey points out that state or regional dispersion continues to be striking unlike China. Although India as whole performed well during , some states have lagged. Thus there has been a lack of convergence. There are two sets of economic indicators: income and consumption, and health/demographic indicators. Convergence means that a state that starts off at low performance levels on an outcome of importance, say the level of income or consumption, should grow relatively faster over time, improving its performance, so that it catches up with states which had better starting points. Referring to convergence in real per capita GDP during , the Survey says that while incomes converged for provinces in China, incomes diverged for states in India. The same trend of divergence is observed in the case of convergence in real per capita consumption for states in India. Thus, despite rapid growth on average there is a sign of growing regional in- 14 industrial economist february 2017

7 Inflation 5.1 % CPI Headline WPI Headline Q1 Q2 Q3 Q4 Q1 Q2 Q3* *Provisional Fiscal Deficit Per Cent of GDP equality among the Indian states. This needs to be addressed early. Inflation contained... The Survey observes inflation is likely to be well below the Reserve Bank of India s target of 5 per cent in the current fiscal thanks to demonetization. Since credit growth has been poor, the Survey indicates room for an easy money policy. In the same breath, the Survey notes the low oil price environment of last few years would not be repeated in On wholesale-price front, a reversal trend was observed from a trough of negative 5.1 per cent in August 2015 to 3.4 per cent at the end of December 2016 due to rising crude prices. There is possibility of sharp rise in prices in that may narrow the scope for monetary easing. Acche Din Ayenge In the wake of the most destructive tsunami of monetization, the Survey offers some solace to the poor by way of a Universal Basic Income (UBI). However, it points out to a number of implementation challenges: it should not become an add on to the current anti-poverty and social programs Unrestrained debts * *Budget Estimates Resources Transferred to States 8,34,483 For long IE has been cautioning on the unrestrained increase in public debt from This eats increasing amounts of revenue through debt servicing - interest payments and repayment of a portion of debt. Public debt has ballooned from a few thousand crores of rupees in 1980 to close to Rs 69 lakh crore today. The Budget estimates borrowing of Rs 5.35 lakh crore to bridge the gap between expenditure and receipts. This means higher cost of debt servicing. India, well - poised to become the FIFTH LARGEST ECONOMY next year should address this weak aspect of its fiscal picture. ` Crore 9,30,674 9,90, % 10,85, '16 '17 ' '18 Actuals BE RE BE BE Budget Estimates RE Revised Estimates cover story Welcome electoral reform... The budget has proposed a much needed electoral reform. The budget attempts greater transparency in electoral funding: in accordance with the suggestion made by the Election Commission, the maximum amount of cash donation a political party can receive from one person will be Rs The budget also proposed to the Reserve Bank of India to enable the issuance of electoral bonds. Under this scheme a donor can purchase bonds from authorised banks against cheque and digital payments. These shall be redeemable only in the designated account of a registered political party within a prescribed time limit. The budget also proposes that every political party should file its return within the time prescribed. Tax relief at the lowest slab... Without conceding the persistent demand for raising the income tax threshold, the Finance Minister has proposed a relief to individual assessees in the lowest bracket: a reduction in the existing rate of taxation for income from Rs 2.5 lakh to Rs 5 lakh to 5 per cent from the present rate of 10 per cent. If the limit of Rs 1.5 lakh under Section 80C for investment was used fully, tax could be zero for people with income upto Rs 4.5 lakh. To make good some of the revenue loss (estimated at Rs 15,500 crore) the Finance Minister has proposed a surcharge of 10 per cent of tax payable on individuals whose annual taxable income is between Rs 50 lakh and Rs 1 crore. With the Opposition parties disrupting Parliament in the previous session, there was the apprehension of these parties blocking the presentation of the budget. There was an attempt by the Congress floor leader seeking a postponement of the budget to pass the condolence resolution for the demise of former MP, E Ahamed. The Lok Sabha Speaker would not concede this. It should go to the credit of the MPs in allowing the Finance Minister to present the budget. One hopes the ensuing discussions would be likewise healthy. The government has reason to feel happy over the significant progress made by the infrastructure sector, notably power and the growth recorded despite the hiccups on demonetisation. Yet a lot more needs to be done in stimulating investments, expanding manufacturing and exports and in meeting the vastly changed global environment. n industrial economist february

8 The many welcome departures... S Viswanathan The budget for has several unique features. We list a few of these: 1 The budget was presented for the first time on 1 February 2017, a month ahead of the practice so far of presenting the budget on the last working day of February. In the earlier practice, the parliament will go for a recess after 15 March, re-convene in early April and vote on account for the demand from different ministries through April. After discussions and amendments, if any, the budget would be passed in May. In this system the first quarter of the financial year would witness ad hoc modest investments. The second quarter, the monsoon season for most parts of the country, would impact revenue and expenditure; thus these are kept at modest levels. The momentum will pick up in the third quarter and peak in the fourth and final quarter. Several departments will struggle to spend the budgeted allocation even leading to lapses or in manipulations or carry forward. The whole exercise thus suffers from uneven revenue and expenditure through the four quarters. In the new changed system, the budget for the year would be passed in the current year itself and thus the actual receipts and expenditure could begin from Day One of the new financial year and thus would be rational. 2 There was no separate budget for the railways. Again this is a departure from the practice of presenting a separate railway budget over the last nine decades. This has given flexibility for the finance minister to address the requirements of the transport sector in a holistic manner. The finance minister could look at the total needs of the surface transport sector in an integrated manner. 3 For the railways there is a saving of around Rs 9500 crore as payment of dividend to the Central exchequer. 4 With elections for five state assemblies announced for March-April there was the problem of announcing special schemes. Political parties in opposition could cry foul over any proposal of concession or relief on grounds of impacting voting pattern. 5 The Prime Minister in his address on 31 December 2016 had announced several new schemes relating to agriculture and other sectors. These are normally the domain of the finance minister. These have, to some extent, pre-empted the budget proposals and also beat the announcement of the election schedule. A cleaver ploy indeed. 6 Instead of computing the revised estimates of the budget of at the end of three quarters, these had to be done on the basis of the figures available for two quarters. With the traditional bunching of expenditure and revenues in the closing weeks of the year, this change would deny the government getting a more precise revised estimate. 7 States have not crystalised their plan to advance their budgets. The computations of their performance and aligning these to the Union budget would pose some challenges. 8 A silver lining is the announcement by the finance minister on introducing the GST from 1 July. The Centre has conceded most of the demands of the states for ensuring this. This single measure is expected to bring about substantial improvements in tax reforms and revenue administration. 9 The budget has used the data on bank deposits after demonetisation to sharpen efforts to expand the tax base. 16 industrial economist february 2017