Budget 2019: Nirmala Sitharaman shows how future budgets should be

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Updated: July 6, 2019 7:07:39 AM

Budget 2019 India: Excise taxes went up for those the FMs wanted to punish, and down for those they wanted to encourage.

Budget 2019-20, Union Budget 2019 IndiaUnion Budget 2019 India: With the very predictable consequence of individual incomes going down and corporate income going up.

Budget 2019 India: Budgets used to be an accounting statement—and Finance Ministers indulged their favourite industrialists to reveal who was favoured and who was not. Excise taxes went up for those the FMs wanted to punish, and down for those they wanted to encourage. Then came GST. Now, 18 months old, and with the GST council making all the decisions, there is precious little for the FM to do on indirect taxes. We await the finalisation of the direct tax code; until then, the budget can tinker around (this time more than tinker) with corporate tax rates and individual tax rates. The good news was that the corporate tax rate was reduced from 30% to 25 % for all but 0.7% of firms. Why not all firms is a question everybody is asking.

And, then, there was the tinkering with income taxes and surcharges on the super-rich—call it an (unsuccessful) balancing act to the reduction of the corporate tax rate or to the fact that tax authorities still have not graduated from their increase tax rate and get lower tax revenue axiom of the Indira Gandhi era. So, bowing to Piketty, the tax rate for the super-rich was increased, via an increase in the surcharge to near 40%, a rate last observed before the Dream tax budget of 1997.

How much extra tax revenue would the MoF get from this exercise? Don’t ask embarrassing questions, but likely the same amount they got from imposing the long-term capital gains tax, i.e., a tax loss rather than a tax gain. Why? Because tax avoidance (a favourite Indian habit) creeps in and absolutely fewer super-rich people will accurately report their super-rich incomes. And, given that the highest corporate tax rate is 28% (25+3% surcharge), there will now be a 12 ppt gap between the corporate tax rate and the rate for rich individuals. Likely the largest such gap observed in the world today. With the very predictable consequence of individual incomes going down and corporate income going up. And total direct tax collection going down. This underlies the urgency of reaching a direct tax code, so the FM’s hands are tied (like they are for indirect taxes). So, this budget may be the last one for tinkerisation of direct taxes.

But all is not lost for those wanting to “intervene”. The budget of the future, likely next year, will be one where the only tax rates being tinkered with will be custom duties. For example, the present Budget imposed a 5 % custom duties on imported books. Most of us want to believe that such purchases should be subsidised, especially since the Budget (correctly) laid emphasis on education and the National Research Foundation. The total value of imported books (children picture books, etc, harmonised code of 4901) in 2018-19 was $154 million or .03 % of total imports. At a 5% tax rate, that will yield tax revenue of Rs 54 crore.

But, that is where the bad news ends. Besides these guffaws (and maybe a few others I missed), Sitharaman’s Budget speech was what budget speeches will be—a vision statement of what the government plans to do. She set the tone of her speech in an honest and direct manner. She was presenting the Budget because the BJP had achieved overwhelming support and mandate. She emphasised the build-up of the foundation of equality—infrastructure, water, sanitation, housing, power, roads—and women empowerment. The provision of these public goods are the essence of good governance, and what inclusive growth is all about.

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Future budgets should be like this one, no longer an accounting statement like past budgets. Accounting should be left to accountants or accounting economists. Thankfully, the FM presented the fiscal deficit as an afterthought; at 3.3% for 2019-20, down marginally from the Interim Budget estimate of 3.4%. The implied nominal GDP for 2019-20 is a 12% increase over 2018-19. Even if nominal growth is 11%, this would mean that the fiscal deficit will be at the originally budgeted 3.4%. Revenues are budgeted to increase by 13.5%—even with slippage on both revenues and GDP, the likely fiscal deficit will be 3.5% of GDP. Finally, and thankfully, such small differences in fiscal deficits are not only not a talking point, but also, at best, a footnote.

We await the future, perhaps as early as February 2020. One can’t expect a Budget to be a perfect statement of intent and vision. But, Sitharaman’s premier Budget statement was a good start.

The author is Contributing Editor, Financial Express

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