As Finance Minister Arun Jaitley rises to present the last full Budget of the NDA government, top-of-mind will be deficits and taxes — personal income-tax rates, capital gains tax on stock market investments, tax on dividend income, and corporate tax. Here’s a route map to negotiate the Budget speech. Follow LIVE updates of what our experts have to say on the Budget
1 — Given the increase in the Centre’s net direct tax collections and the widening of the taxpayer base, is a reduction in personal income-tax likely in the Union Budget?
The last Budget had halved the tax rate on the personal income slab between Rs 2.5 lakh and Rs 5 lakh to 5%. That move — reducing the tax liability, including of people with incomes in the subsequent slabs, from Rs 25,000 to Rs 12,500 — cost the exchequer an estimated Rs 15,500 crore. Further rate cuts would, therefore, seem difficult. But then, the Centre’s net direct tax collections (from personal and corporate incomes) during April-December 2017 have been 18.2% higher than for the same period of the previous year, and more than the budgeted 15.7% growth for 2017-18. Also, the Economic Survey has shown 18 lakh new individual income-tax filers being added, over and above the trend growth, between November 2016 and November 2017. The significantly widened tax base and higher compliance post-demonetisation and GST should allow for some concessions, particularly to those not resorting to any evasion.
While revenue considerations may not permit rate reductions, there is a possibility of the Budget raising the limit for claiming deductions under Section 80C of the Income-Tax Act. Such deduction — reducing the effective taxable income — is currently available on aggregate annual investments of up to Rs 1.5 lakh in the Employees’ Provident Fund, Public Provident Fund, equity-linked savings schemes, unit-linked insurance plans, etc., in addition to expenses such as life insurance premiums, home loan principal repayment and payment of tuition fees. The Section 80C limit was increased from Rs 1 lakh to Rs 1.5 lakh in the 2014-15 Budget. In the government’s last full Budget, this limit could be raised to Rs 2 lakh, or even higher.
2 — Could the favourable treatment to stock market investors go, given the perception that they have made hay during the last two-three years, even as the rest of the economy hasn’t done too well?
Currently, there is no tax on capital gains from sale of equity shares or equity mutual fund units, when such sales are after 12 months of their purchase/investment. If sale happens within 12 months of purchase/investment, the capital gain from it is termed “short-term”, and taxed at a flat 15.45% (15% basic rate plus 3% education cess on it). Capital gains arising after 12 months is considered “long-term”, and is not taxed. But the definition of “long term” could be extended to 24 months (as in the case of capital gains from sale of immovable property such as land, building or house) or 36 months (as in jewellery or debt-oriented mutual fund units). Also, the tax rates themselves can go up. At present, long-term capital gains arising from assets other than equity shares and equity mutual fund units is higher at 20.6% (20% basic plus 3% education cess on this rate). In their case, short-term capital gains, too, is added to income and taxed at the applicable slab.
3 — Could favourable tax treatment on company dividends end, since the recipients of dividend income are mostly promoters and investors who are believed to be better off than ordinary salaried folk?
Dividends up to an annual amount of Rs 10 lakh received from domestic companies are now exempt from tax. Even on dividend income above Rs 10 lakh, the tax rate on the extra amount is only 10.3% (10% plus 3% cess). That would seem unfair when regular salary income of even Rs 5-10 lakh a year attracts 20.6% tax (20% basic plus 3% cess) for that slab, with the marginal rate at 30.9% beyond Rs 10 lakh. But then, it is argued that dividends also get taxed at the time when companies declare, distribute or pay these to shareholders. The dividend distribution tax (DDT) is levied at 20.36%, after adding surcharge and education cess to a basic rate of 15%. One way to address this supposed double taxation is to scrap the DDT, which ultimately also acts as a disincentive for companies to declare dividends. Dividends can, instead, be taxed solely in the hands of shareholders/investors and at rates corresponding to their income slabs. It would be interesting to see if the Budget attempts this.
4 — In his 2015-16 Budget speech, the Finance Minister had proposed reducing the rate of corporate tax from 30% to 25% over a four-year period. Is a cut in corporate tax likely?
There is a case for it today, especially with the Donald Trump administration slashing the tax on corporate profits from 35% to 21% beginning this year. Finance Minister Arun Jaitley in his 2015-16 Budget speech had proposed reducing the rate of corporate tax from 30% to 25% over a four-year period, conceding that the existing level was higher than that in other major economies, “making our domestic industry uncompetitive”. The basic corporate tax rate has since been brought down to 25% for companies with annual turnover below Rs 50 crore. But even for them, the effective rate after adding 12% surcharge and 3% education cess comes to 28.84%. For domestic companies with turnover more than Rs 50 crore, the basic tax rate is 30% (effective 34.608%); for foreign firms it is 40% (43.26% with a 5% surcharge and 3% cess).
But slashing the corporate income-tax rate is politically tricky, especially in an election year, when no ruling party would want to be seen as “pro-corporate”. One way out could be to end all exemptions, deductions and concessions. Finance Ministry data show the effective tax rate paid by companies with pre-tax profits of more than Rs 500 crore during 2015-16 averaged only 25.90%. This was far lower than the statutory rates of 30-40%. If the Budget does away with all tax breaks — which can be politically marketed as putting a stop to corporate subsidies availed mostly by larger firms — the basic rate can be brought down to 25%. That is close to the current effective rate for big companies.
5 — Will government deficit targets be met? Does it matter if they aren’t?
The Centre’s fiscal deficit — the gap between its revenues and expenditures, to be filled through borrowings — has been budgeted at 3.2% of GDP for 2017-18, and is supposed to be reduced to 3% in the Budget. Adherence to deficit targets may not have mattered a year ago, when interest rates and inflationary pressures were low. But in the last six months, the average cost of crude imported by Indian oil refiners has jumped from about $ 48 to $ 65 a barrel, while interest rates (yields) on 10-year government borrowings (bonds) have climbed from roughly 6.5% to 7.5%. Also, global interest rates are rising — 10-year US Treasury bond yields have gone up from 2-2.1% to over 2.7% since early-September — with central banks in advanced economies withdrawing monetary stimulus measures that were put in place after the 2008 financial crisis.
The “normalisation” of monetary policies is happening much faster than expected, in response to surging oil prices and a synchronised global economic recovery. On Wednesday, the US Federal Reserve said that it expects inflation to “move up this year” and economic conditions to “evolve in a manner that will warrant further gradual increases in the federal funds rate”, even as the central bank refrained from increasing its benchmark rate in the last meeting under its outgoing chairperson Janet L. Yellen. Higher global interest rates can potentially impact capital flows into India. That threat is magnified in the event of fiscal slippages, which call for increased government borrowings. The resultant higher bond yields could eventually lead to higher interest rates for Indian firms and households as well.
END-OF-TERM BUDGETS: WHAT EARLIER GOVTS DID
UPA 2 last full Budget, 2013-14 (P Chidambaram, Feb 28, 2013)
The last full Budget of the UPA in its second term didn’t have much to offer — the economy was in a bad shape with growth stalling, and a huge current account deficit and fiscal deficit. The Finance Minister announced a new investment allowance to encourage new investment, some sops to promote home ownership, and liberalised an equity savings scheme.
UPA 1 last full Budget, 2008-09 (P Chidambaram, Feb 29, 2008)
In the last full Budget of UPA 1, Finance Minister Chidambaram announced a farm loan waiver of Rs 50,000 crore and a one-time scheme relief of Rs 10,000 crore; a national rollout of the NREGS with more funds being allocated; and a thrust on financial inclusion — all of which paid rich dividends in the Lok Sabha elections of 2009.
Interim Budget, 2004-05 (Jaswant Singh, Feb 3, 2004)
As the Atal Bihari Vajpayee government got into election mode, what was essentially a vote-on-account (setting aside funds to meet essential expenditure for the first four months of 2004-05) was used by Finance Minister Jaswant Singh to extend the Antyodaya Anna Yojana to more BPL families, raise free baggage allowance for international travellers to Rs 25,000 from Rs 12,000, and commit to extend the tax exemption on listed equities.