Budget 2019: What Nirmala Sitharaman must do to revive economy, consumer demand

Published: June 24, 2019 2:28:36 PM

Union Budget 2019 India: The first budget by India’s new Finance Minister Nirmala Sitharaman comes at a time when the economy is displaying signs of a slowdown, coupled with concerns over widespread unemployment.

Budget 2019, Union Budget 2019 India, Budget 2019 India, Budget 2019-20, nirmala sitharamanUnion Budget 2019 India: The Ministry of Statistics and Program Implementation has put the unemployment rate for the 2017-18 periods at 6.1%.

By Vivek Jalan

Union Budget 2019 India: The first budget by India’s new Finance Minister Nirmala Sitharaman comes at a time when the economy is displaying signs of a slowdown, coupled with concerns over widespread unemployment. For the first time in five years, the Indian GDP growth rate slid below the 6% mark in the January-March quarter when it grew at 5.8%. Global rating agency Fitch Ratings cut down India’s GDP growth forecast to 6.6 per cent for the current fiscal from the earlier projection of 6.8 per cent. The Ministry of Statistics and Program Implementation has put the unemployment rate for the 2017-18 periods at 6.1%. These figures point to the imminent need for a growth stimulus budget that can put the economy back on a high growth trajectory while helping improve the job scenario.

India has set itself a target of becoming a 5 trillion economy by 2024. The government needs to tread a fine balance to accomplish the multiple competing needs of increasing revenue to finance its social and health projects, keeping the fiscal deficit in check while also announcing measures that propel economic growth. The people of India have given a strong mandate to this government, displaying their trust in its ability to steer the economy. It is now time for the government to deliver.

Also read: Budget 2019: Modi government may reduce income tax burden on middle class taxpayers; top 5 things to expect

Let’s take a look at what the industry expects from the upcoming budget:

Rationalizing Corporate Tax

India has one of the highest corporate tax rates among economies of comparable scale. While the corporate tax stands at 30%, coupled with a Dividend Distribution Tax of 20 per cent, the tax rate on corporate comes to a whopping 50%. This needs to be rationalized with utmost urgency. Allowing businesses more breathing space in terms of profits is critical for their expansion, which in turn is crucial for India’s economic growth. In recent months, both the UK and the US have announced cuts in corporate tax to make businesses more profitable and attractive to investments as measures to boost growth.

The US reduced its corporate tax rates from 35% to 21% recently. Indian industry also needs an intervention to rationalize corporate tax rate. A business boon by default also creates more jobs, something the Indian economy badly needs right now. The 2018-19 budget had lowered corporate tax rates to 25% for all companies earning less than Rs 250 crore in annual revenue. The industry expects this tax rate to be made universal. While reducing the tax rate, the government must also do away with myriad tax exemptions at different levels. This will on the one hand simplify the tax structure while also reducing the scope of litigation and improving the ease of doing business.

Also read: Budget 2019: What FM Nirmala Sitharaman can do to remove the current flaws in Standard Deduction?

Rationalize other taxes and tax clauses

Minimum Alternate Tax is another punishing tax for honest business organizations. Currently, it stands at a rate of 18.5% which is very high. Notably, MAT started with a rational rate of 7.5% and grew to 18.5% over time. This needs to be brought around to 15%.

Another contentious taxation section that needs reform is the taxation on Dividends. After paying hefty tax on corporate profits, companies are further required to pay a dividend distribution tax (tax on dividends to shareholders). Simultaneously, the equity holders (individuals, firms or HUFs) getting the dividends are also taxed when the income from such dividend is more than Rs 10 lakh. This multiple taxation on dividends is unhealthy, even unfair. It must either be done away with or its rates reduced to encouraged taxpayers make equity investments.

Under current scheme of things, the CSR spends of organizations are considered to be an allocation towards profits. However, given the fact that CSR spending today is a statutory obligation, they must be allowed to be counted under expenditure while computing taxable income.

More disposable incomes in peoples’ hands

Consumer demand has shown signs of being slugging over the past year impacting the growth of the manufacturing sector. The Budget needs to find ways to put more money into the hands of people with an objective of boosting consumer spending as well as savings. In the interim budget earlier this year, the government had announced a tax rebate up to Rs 5 lakh. However, the fact that the existing tax slabs were left unchanged meant that people with taxable income of more than 5 lakh received no benefit of this exemption. The government must consider changing the tax slabs in a way that tax rate is slashed from the current 20 per cent to 10 per cent to those earning up to Rs 10 lakh. This will leave more disposable personal income in the hands of the middle class and give a boost to savings and expenditure in the economy.

The author is Co-Founder, Tax Connect Advisory Services. The views expressed are the author’s own.

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