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Pre-Budget Pangs Are In Order - Outside View by S.S. TARAPORE
 
 
Pre-Budget Pangs Are In Order

If one is to give serious consideration to the views of large industry, economists and opinion makers, the common person has much to fear from the Union Budget for 2015-16, which is to be presented by Finance Minister Arun Jaitley on February 28, 2015. Under the Fiscal Responsibility and Budget Management Act (FRBM), the gross fiscal deficit (GFD) is to be reduced to 3.6 per cent of GDP in 2015-16 and 3.0 per cent in 2016-17. As it is the glide path has, over the years, experienced deviations and postponement of targets. Powerful segments of society and a number of eminent economists have formed cheer squads on the sidelines, urging the government to replace dogma with pragmatism on fiscal and inflation targets. These lobbies claim that the government should do whatever it takes to get the economy going. Sage economist Shankar Acharya rightly argues that while there is a case for increase in infrastructure expenditure, this should be accommodated within the envelope of fiscal prudence.

Favourable treatment for upper income groups

Translating the thoughts of the fiscal expansionists into concrete measures, it is recommended that the government should kick-start the economy with a larger GFD and above all, not put any tax burden on industry. It also implies that higher income groups should be provided more favourable income tax slabs i.e. the maximum tax rate should apply to incomes over Rs 20 lakh per annum, as against the present Rs 10 lakh. Of course, these powerful lobbies would not countenance any talk of an inheritance tax, gift tax (without exemptions for gifts to relatives), a capital gains tax on STOCK MARKET transactions or a tightening of the wealth tax regime.

Taxing of dividends

Needless to say, the powerful lobbies would not want the dividend distribution tax (DDT) to be abolished and the status quo ante restored, under which individuals receiving dividends would be taxed. Of course, these advocates would like the DDT to be abolished and also, individuals receiving dividends should not be taxed. The last time a finance minister (Yashwant Sinha) reintroduced the tax on dividends received in the hands of individuals, he was shifted to the ministry of external affairs.

Unlimited exemption of dividends from income tax is a fiscal atrocity and is not reflective of distributive justice. If dividends are to be exempt from payment of tax by the recipient, there should be an appropriate limit for such an exemption. Ideally, all dividends received in the hands of individuals should be taxed at the maximum tax rate and tax credits given to individuals. The lower income groups will receive refunds, while the upper income groups would not receive any refunds. If this is not acceptable, at least the DDT should be raised by five percentage points.

Raising basic exemption limit for income tax

Taxpayers in the lowest tax slab deserve some relief and in this context, the basic income tax exemption limit could be raised. This will lighten the tax administration burden. This revenue loss can be recouped by either a slight increase in the tax at the maximum slab or alternative taxes, say on inheritance, gifts to relatives and wealth tax could be imposed. Privileged segments of society would see to it that there is no increase in taxes for them.

Concern over falling savings

Since the ratio of gross domestic savings as a percentage of GDP has fallen in recent years, from 36 per cent to 30 per cent, some urgent action is necessary. The government provides extremely high effective rates of return under Section 80C. The government should provide at least one instrument for long term savings without any tax concession. Furthermore, the mandatory savings in Provident Funds could be raised. This is appropriate, as many countries have much higher mandatory savings.

To foster savings it is necessary to slow down some segments of consumption. The minimum down payments need to be raised steeply, which would discourage hire purchase schemes and thereby result in a substantial increase in net savings.

Curbs on government expenditure

The Bimal Jalan Expenditure Commission would, it is hoped, make recommendations which would result in substantial reduction in government expenditure. There are some subsidies which can easily be reduced. A glaring illustration is the subsidy on LPG which is available to all consumers. Asking individuals to voluntarily give up this subsidy is not workable. A simple means test could be used to curtail this subsidy. For instance, all income tax payers and their families could be ineligible for this subsidy.

Government and Public Sector Units (PSUs) have become soft and there is a quantum jump in their conspicuous consumption. This is because of a demonstration effect from private sector corporate, which provide for obscene incomes for their honchos. Any attempt to control these incomes would result in an uproar, but if this is not done, it would be difficult to curb non-priority government expenditures.

It is essential to ensure that while cuts in government expenditure are undertaken, the vulnerable social sectors, such as health, education and women and children welfare measures are not curtailed.

Note: This article was first published in The Freepress Journal on February 23, 2015. Syndicated.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.

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