In a season troubled by the third wave of the pandemic, with new variant Omicron, and excited by the forthcoming Assembly elections in five states, can we expect anything dramatic and path-breaking in the Union Budget 2022? Perhaps not, in order to not disrupt a fragile recovery, though the underlying pent up animal energies are straining at the leash. But if India is going to break into the next generation of economic reform, there is a dire need for bold steps both on the expenditure and revenue sides.
Among many things being asked for, mostly unlikely pleas for further concessions on the existing tax structure, two things stand out. One, growth-oriented announcements that exceed our expectations. An example is the handsome effort to attract semi-conductor manufacturers to India.
Two, a widening of the tax base to encompass every bank account and digital payment platform user. The time has come to put all citizens on the same basis with no one outside the tax net. We have long been doing it in our indirect taxes, that skim everyone without fear or favour, so why not? Our indirect taxes are, in fact, pretty heavy.
Growth, estimated at 9.2 percent in GDP for FY22, can indeed come from multiple sectors both traditional and frontier. Newbies include start-ups and unicorns, pharmaceuticals where India has an edge, software and increasingly, electronic hardware. The export of BrahMos missiles, and other made in India high-value defence items. This, to other countries, in addition to the Philippines, such as Vietnam and the UAE. The grand start of a high-end semi-conductor manufacturing industry in collaboration with Taiwan, and possibly South Korea and the US.
The already extensive services sector that accounts for over 54 percent of the economy (Rs 101.47 trillion –$1,439.48 billion in FY20), will chug along, perhaps to become 75 percent of an enlarged pie, like in the US. Economically speaking, agriculture will assume a smaller per centage of the whole, despite its high-profile farmers, their political clout, their woes, and their agitations.
Infrastructure development, including roads, tunnels, bridges, city metros, the railways and freight corridors, already in high gear, will boost medium to long term gains. Even as the large expenditures on infrastructure shores up the present GDP rates. Real Estate too is likely to revive now and pull itself out of a several year slump. It is the second biggest employer after inefficient agriculture, and cannot be sniffed at forever for its cash-loving ways.
Personal income taxes involve barely 6.32 crore people out of a population of 1.40 billion. Even with an increase in collections of 60 per cent from a pandemic hit low base in FY22, direct taxes account for Rs 5,15, 870.5 crore in net corporate tax, and Rs 4,29,406.10 crore from net personal income tax. This is a total of Rs 10,80,370.2 crores. Contrast this with the total of indirect taxes, that involve most of the public at an estimated Rs 11,02,000 crore in 2021-22. Of this, Rs 6,30,000 crore is expected to come from GST.
The gross tax revenue for FY 22 is expected to be fed by 28.4 percent from corporate tax, 16.3 per cent from income tax, 14.7 percent from GST, 14.2 percent from customs duty, 22.4 percent from excise and other heads for another 3.9 percent.
But if an expenditure tax could raise 50 percent of the gross annual tax revenue, expected to be 25.1 lakh crore in FY22, after the abolition of corporate and income tax, how would that be?
A back calculation exercise will determine what the quantum of the miniscule expenditure tax should be spread over all users of banks and digital pay platforms. But one could begin with just 0.001 percent, with a view to increase it if necessary.
Every year there is a clamour for increases in income tax slabs and reduction of corporate tax from the chartered accountant fraternity. There is a demand for an increase in standard deduction, to be doubled to Rs 1,00,000 from the present Rs 50,000 this year too. The taxes applied to dividends and capital gains in the stock market are also not liked by the investors.
But the government is constrained by its funding requirements, and forever looking at new means to extend its tax net. The fiscal deficit of around 6.6 percent of GDP exerts its own pressures. Even taxes on fuel, a major irritant for consumers, are largely inelastic, especially in a pricey crude scenario.
But at the top level the maximum effective income tax rate is a prohibitive 42.774 percent, including all the surcharges. This is driving many businessmen and HNIs out of India to gentler tax regimes.
And the bulk of the people who yield any personal income tax are the salaried class working mostly in the formal sectors. It is mainly they who have TDS deducted at source. This is not adequate in terms of numbers, as a tax-paying ‘captive’ class. Given that most businessmen and self-employed professionals avail of multiple tax reduction and legitimate avoidance measures. These are not readily available to the salaried class, beyond ELSS and allied provisions. Besides, all those earning below Rs 5 lakhs are effectively tax free now, a sizeable number. Corporate taxes too have been reduced to 25 percent and even 15 percent in certain cases.
The so-called unorganised sector, working below the government radar, accounts for over 80 per cent of all the companies operating. The proposal of a universal but minuscule expenditure tax has been mooted several years ago and has once again been mentioned by some analysts this year. Will the government embrace it this time? It could say it will work on it, come 1 February.
If it does, it could dismantle direct taxes, including those on corporations and individuals, HUFs alike. And all the costly administration involved from the CBDT as well. The concept of tax avoidance would now apply to only those who refuse to use either the bank or any digital means. This is difficult in practice.
With an Expenditure Tax applied to every bank transaction/digital use instead, the tax net would stretch to practically everybody now that the bulk of the unbanked have also been drawn into the net. If the expenditure tax is minuscule, say at the 0.001 percent mentioned, it cuts through the argument, long carried forward by leftist economists, that the rich should be taxed and not the poor. Taxation that even a poor man does not mind can still add up to a tidy sum.
The writer is a Delhi-based commentator on political and economic affairs. The views expressed are personal.
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