Do student protests precede big reforms?

The expectation from Budget 2020 is that it will provide a stimulus to the staggering economy by spending on infrastructure (that leads to job creation and higher wages) and by putting more money in the hands of the people to rekindle consumption by reducing what 35 million Indians pay as income tax. The spending on infra route has a delayed cycle of impact because it takes time for the projects to come up and the ripple effect of jobs and consumption to take place. Putting more money in the hands of the people has a direct impact if people indeed spend the taxes they save. The problem in India is that consumption may have stalled due to the informal economy holding on to their cash and not spending it. While getting the informal part to formalize is a waiting game, it does look as if the government has little option but to let go of the Financial Responsibility and Budget Management (FRBM) target for financial year 2020-21 that restricts the fiscal deficit to 3% of the GDP.

Read more

Opinion: Budget should clean up capital gains, DDT mess

The problem of the Indian budget exercise has been to somehow get the reluctant individual to pay income tax. Step back and see that a government needs tax revenue to run the government itself, pay for government institutions (health, education and defence, to name just a few), spend on infrastructure, pay interest on borrowings and so on. A prudent government’s capacity to spend depends on its capacity to raise revenue through taxes—both direct and indirect. A profligate government will simply borrow recklessly and kick the problem down the road for future governments to handle.

A key problem that faces the Indian budget is that too few people pay income tax, with just 32.3 million people filing ITR-1 (the return for salaried individuals) on a population base of 1.37 billion. Successive governments have attempted to get the reluctant Indian to pay income tax and failed. Therefore, they have used a tax on incomes and profits on investment to try and get those who should pay, to pay. But successive governments have then gone on increasing the burden and the complexity of this taxation so that today two taxes are in a total mess: the dividend distribution tax (DDT) and the capital gains tax.

Read more

 

What we want (and what we get) from the Budget

Ask any average middle class person what they want from the Budget and the answer is lower prices and less tax. In a way these are contradictory goals because lower tax rates could mean a revenue shortfall. A tax revenue shortfall can cause a government to borrow more, causing the deficit to increase and that could cause a price rise. Didn’t make the link? Let me try and unpack this. The annual budget presentation is a financial statement of the central government where the collection of revenues and its spending is laid out. The government gets most of its revenue from taxes (both direct and indirect) and about one-fifth from non-tax sources. Direct taxes are paid by companies and individuals under various heads (income tax, tax on house property, tax on profits and so on). Of the total revenue, income tax on non corporates (that means us) is about one-fifth of the total revenue for the year. Corporations pay a bit more than we pay. Almost half of the revenue comes from indirect taxes—it used to be excise and sales tax, but now this revenue comes through goods and services tax (GST). The shortfall in revenue over what has to be spent is called a “deficit”. This deficit gets funded largely through the money the government borrows.

Read more