Budget 2016: Finance Minister Arun Jaitley and Prime Minister Narendra Modi must be pleased with the World Bank’s projection that, with 7.8% growth, India will remain the fastest growing economy in the world in 2016.
The World Bank says, “Growth is projected to slow further in China, while Russia and Brazil are expected to remain in recession in 2016. The South Asia region, led by India, is projected to be a bright spot”.
While it is true India has attained the fastest growing status mostly because the earlier fastest growing nation, China is under trouble and the global economy, is also still struggling – the NDA budget-team led by FM Arun Jaitley under the supervision of PM Narendra Modi has a golden chance to usher in a comprehensive policy framework to support a sustained investment-led growth model in the upcoming Budget.
Be it Make in India or Start-up India, ease of doing business will play the biggest role in promoting investment and the budget must outline a roadmap to clear the messy atmosphere here by reducing the government role in the setting up and running businesses to a minimum and promoting a market-led pricing mechanism.
It would be better to have a common policy framework for all the sectors based on these two basic principles as a base model instead of sector-specific policies.
Of course, startups need more support in setting up businesses, running them, and also in exiting – for large businesses also, these are equally important – but it is the market-led pricing mechanism that is going to play a crucial role in attracting investment.
So, the government would do well by announcing its intention of creating a level-playing field in all areas of businesses, be it retail or oil and gas, and let the market forces decide pricing, something which is due in the pricing of gas for quite some time impacting investments in a big way.
In terms of taxation, it is good that the process of reduction in the corporate tax rate from 30% to 25% over four years with phasing out of exemptions is beginning this year.
But, a similar exercise in the personal income tax domain is also due.
The investment-led growth model will also allow FM Jaitley to restructure the income tax rates for individuals in a manner that helps in expanding the personal income taxpayer’s base from current around 3.5 crore to at least 7 crore in the next few years.
The top tax rate of 30% is currently kicking off at Rs 10 lakh which is quite low, forcing people to adopt ways to remain in the lower brackets (Rs 5-10 lakh having a 20% rate or if possible, between Rs 2.5-5 lakh that attracts 10% tax) and they will have to find ways to push this limit up suitably and merge all the exemptions, barring a few exceptions, into a composite non-taxable income level.
The analysis of tax returns in FY12 brought out the fact that while the number of taxpayers showing income up to Rs 5 lakh comprised 98.3% of the total, they paid just 10.1% of the tax collected that year – those with an income above Rs 20 lakh were just 1% of the total but contributed 63% of the tax collections.
This clearly shows that people in the middle-income bracket tend to depress their income to be able to remain in the lower tax slab.
The Direct Taxes Code Bill, 2009, had proposed income between Rs 1.6 lakh to Rs 10 lakh to be taxed at 10%, between Rs 10 lakh and Rs 25 lakh at 20%, and that over Rs 25 lakh at 30% along with the scrapping of several tax deductions like those on investments in life insurance or provident funds and interest paid on housing loans.
If it is not possible to adopt exactly this structure due to the revenue concerns at this juncture, FM Jaitley must at least signal a start to this process also in the coming Budget.