The task of the finance minister (FM) is not an enviable one as he gets ready to present the Union Budget on February 1. After the hardships that people went through in the wake of demonetisation, every section of society will be eager for sops.
First, consider the broad contours of the landscape under which Finance Minister Arun Jaitley has to present the Budget. There is no immediate positive impact of demonetisation on the precarious fiscal deficit as yet. Government expenditure has to increase to boost economic growth. The FM might have to announce more steps to fulfil Prime Minister Narendra Modi’s personal commitment to eradicate the scourge of undisclosed money. He might also have to factor in the compulsions arising from elections in multiple states. In the wider global context, he will have to take into account the impact of global events such as Brexit, the US elections (the attractive tax regime planned there) and anti-globalisation policies. The bottom line is that the government will have to do a balancing act to cheer the people and sustain economic growth.
Given this backdrop, one suggestion the FM could consider is that by 2020, India will have the largest youth population in the world. Hence, the youth should have employable skills. Along with policy interventions around skill development, the government should consider incentivising parents to contribute to the task of generating employable skills. Parents who put their children through STEM (science, technology, engineering and medicine) education should be given encouragement through tax incentives.
From the policy perspective, the government would like to boost expenditure. While the government itself is a big spender, an increase in disposable income will help increase consumption. Therefore, from an economic stand point it makes sense to leave money in people’s hands.
Next, let us look at expectations from the Budget proposals from a personal tax perspective.
Rationalisation of tax rates: To increase personal disposable income and bring some cheer to the people, the government might increase the basic tax exemption limit. The exemption limit of Rs 2.5 lakh has not been increased for three years, although a tax rebate is available for up to Rs 3 lakh. In the 2015 Budget , the government had mentioned it would reduce the tax rate for domestic companies from 30 per cent to 25 per cent. However, no such reduction in tax or increase in basic exemption limit was considered for individuals. It is a proven fact globally that reducing the tax rate or increasing the basic tax exemption limit can help broaden the base and make people more compliant.
While expectations might be high, one should expect only a moderate increase in the threshold, from Rs 2.5 lakh to Rs 3 lakh. The cost to an already precarious fiscal Budget will not be small. Earlier when the basic tax exemption limit was increased from Rs 2 lakh to Rs 2.5 lakh, four million taxpayers went out of the tax net.
Enforcement measures to track and tax ‘untaxed’ income: The government has already offered several amnesty schemes and made clear its intention of going after tax evaders. There is a likelihood of strong measures to enforce tax and other regulatory laws. There could be multiple tracking and reporting of high-value transactions such as jewellery, luxury goods, travel and conspicuous goods, and matching of such transactions with income-tax returns.
Housing benefit: Given the government’s ambition of “Housing for all”, it is expected that the interest deduction on self-occupied house property could be enhanced from Rs 2 lakh to Rs 2.5 lakh per annum. Also, the limit on the number of years to construct or purchase a house property is expected to be liberalised or rationalised, considering the slow growth of the real estate sector and delayed possession due to defaults by builders.
Encouragement to household savings: It is expected that the government might increase the generic deduction under Section 80C from Rs 1.5 lakh to Rs 2 lakh to boost household savings Budget 2017 India through various financial instruments like life insurance, public provident fund, post office schemes, national savings certificates, five-year fixed deposits, etc. In the short term, an increase in the 80C limit will result in a dip in income-tax collection. However, in the long run, the government stands to gain as household savings will help curb the fiscal deficit and provide funds for spending.
Encouragement to invest in NPS, infrastructure bonds: Demonetisation of high denomination notes led to a huge amount of cash being deposited in banks and post offices. The government may encourage investment of such surplus funds by providing tax-based investment incentive schemes to counter the fall in interest rates. It might further push investment in the National Pension System (NPS) by increasing the amount of deduction to Rs 1 lakh, from the existing Rs 50,000. This will be in line with the government’s policy to provide social security for all citizens.
Further, to boost the growth of real estate and infrastructure, the government may reintroduce deduction under Section 80CCF, which provides additional benefit for investing in notified long-term infrastructure bonds.
On New Year’s eve, the prime minister announced specific interest rates for deposits by senior citizens. We might see a few more incentives or tax benefits for senior citizens. fixed deposits have always been the most prominent mechanism of saving for the common man. Given the recent reductions in interest pay outs by banks, it is expected that Budget 2017 will increase the threshold limit for tax deducted at source (TDS) from the existing limit of Rs 10,000. Alternatively, TDS of 10 per cent on FD interest may be reduced to encourage people to save.
Encouragement for digital transactions: The government has already announced special tax rates for transactions through digital methods, incentives for digital transactions, and special relief in case of payments made through digital methods. This Budget might bring some more personal income-tax incentives for digital transactions.
Salaried taxpayers will continue to hope for a much awaited revision of exempt allowances and benefits such as medical, leave travel assistance and education related benefits. The PM has got us used to bear “pain” for the greater good of the country. Now there is an expectation of some balm to relieve the pain.