New Delhi: In the perennial tussle between Bharat and India, has the hinterland won? The pro-poor, pro-farmer, pro-small business proposals presented by Finance Minister Arun Jaitley in the Budget for 2017-18 surely seek to portray this government as a friend of the masses. Not of the classes, nor of big business. Rahul Gandhi’s stinging ‘Suit Boot ki Sarkar’ charg, leveled before the Budget presentation last year, has now been quite effectively negated with all that the Budget promises. To hammer in its pro poor leanings perhaps, Jaitley pointedly ignored one of the most persistent demands of India Inc. - that the government lower the headline corporation tax rate. The other long standing gripe of the suits, about eliminating Minimum Alternate Tax (MAT), was also passed over. To all intents and purposes, Jaitley sent out a clear message: the wealthy are to bear the tax burden for the less fortunate and the large corporations must bear the cross of taxes even as smaller companies get a relief.
Whether Jaitley has been able to achieve this socialist, left-of-centre narrative in India’s economy will become clear as the fine print on his tax proposals is read, re-read and analysed over the next few days. He has lowered corporate tax rate for companies with a turnover of Rs 50 crore by five percentage points, income tax for those earning upto Rs 5 lakh a year has been halved. And those earning between Rs 50 lakh to Rs 1 crore have been slapped with an additional 10 percent surcharge.
On the corporate front, Jaitle has cut corporate tax rate only for the MSMEs while on the personal income tax front, large swathes of the middle class have been left untouched while the rich bear the cross. It is quite possible that after the dust settles on the Budget, his proposals may become mere indications of a change instead of bringing about any real change in the lives of Bharat.
The focus on MSMEs while cutting corporate tax rate could, some argue, enable massive job creation in the economy as the MSME sector has borne the worst impact from cash squeeze post demonetistaion. Jaitley has himself said as much in post-Budget interviews to some newspapers. But analysts at Ambit Capital doubt any impetus has been provided to job creation through this single move.
In a note to clients, they said “The GDP growth in India is decisively slowing as evinced by the dramatic slowdown in bank credit as well as auto sales volume growth in Q3FY17……GDP growth in FY18 would be lower than what it would have been had the government not forced the economy to formalize at such a rapid pace. The increased focus on tax compliance is likely to mean that the non-tax paying informal sector in India will shrink at a rapid pace. This in turn will entail a degree of demand destruction as the informal sector accounts for +40 percent of India’s GDP and provides employment to close to +75 percent of the labour force”
So what happens to India Inc’s wishlist? According to a CII pre-budget memorandum, the effective corporate tax rate is just 19.8 percent now (much lower than the headline rate of 30 percent, thanks to myriad exemptions). And India Inc wanted it lowered to 18 percent, including all surcharges and cess. “We believe that in the past when corporate tax has been lowered, corporate tax collection has gone up. An 18 percent corporate tax should therefore not lead to revenue loss to the government and at a stroke move us away from a high tax, high concession regime. This will bring India in line with the most attractive international investment destinations such as Singapore, Sri Lanka, UK and Turkey,” CII had said.
Another business chamber, Assocham, had sought “immediate” reduction in the corporate tax to 25 percent to attract more investment in the country. Neither business chamber had presumably counted on the FM to lower taxes exclusively for MSMEs, specially since he has earlier promised to gradually reduce the headline corporate tax rate while also doing away with exemptions.
A tax expert had pointed out that tangible benefits would accrue to the economy by reduction in corporate taxes – not by lowering personal income tax rates. He had said this single move would mean job creation and incentivizing the manufacturing sector so that the overall economic growth is enhanced. “What will lowering personal income tax achieve except conveying the message that the rich will have it easy….already, GST has strengthened the perception that tax inequality will increase since this tax will be equal for the rich and the poor…..income tax rates won’t be tinkered with this time,” he had said.
According to a post-Budget analysis by ratings agency Crisil, corporate tax, a levy companies pay on their earnings, is expected to grow the fastest in at least three years in the current fiscal to 9 percent versus 5.7 percent and 8.7 percent in the preceding two fiscal years. It is obvious that with central excise collections expected to take a major hit next fiscal due to GST, the finance minister does not want a dip in corporate tax collections.
So Crisil has projected that collections from this levy will keep up this growth trajectory even in the next fiscal at 9.1 percent. This single levy accounted for almost 30 percent of the government’s total tax revenue in the current fiscal at almost Rs 4.94 lakh crore. Or roughly a third of all tax revenues come from this single levy. But it is projected to come down in its share of total tax revenues next fiscal to just 28 percent at almost Rs 5.39 lakh crore. Corporate tax accounted for 35 percent and 31 percent of total tax revenue in the two preceding fiscal years.
Then, even when dealing with the high-octane personal income tax issue, Jaitley played the class tune. He lowered taxes only for the lower middle class, for people earning up to Rs 5 lakh. Crisil’s analysis shows only two crore Indians will benefit from this. That is less than 2 percent of India’s population though this section accounts for almost a fourth of the government’s total income tax revenues. Crisil goes on to say that sectors like transport and affordable housing received a shot in the arm.
This is expected to push demand in sectors such as cement and steel, generating positive multiplier effects in employment and incomes. “This, to an extent, will help alleviate some stress in rural areas which were hit hardest by the demonetisation drive. Also, the reduction in individual income tax rates (brought down to 5 percent from 10 percent for those in the income slab of Rs 0.25-0.5 million) will raise the purchasing power. Nearly, 20 million people who currently declare income in this bracket will benefit from the change.”
Whether Jaitley’s preference for Bharat at the cost of India works towards improving India’s economic growth will be apparent in the next few months. But one thing is sure: the Suit Boot wale have been given short shrift by the government this year.
For full coverage of Union Budget 2017 click here.
Updated Date: Feb 02, 2017 16:15 PM