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  1. Union Budget 2017 may drive domestic economy to sustain GDP growth

Union Budget 2017 may drive domestic economy to sustain GDP growth

The Budget can be a historic one if it leverages the opportunity of rolling out the next wave of reforms.

Published: February 1, 2017 3:37 AM
Budget 2017 tax, Budget 2017 GST, Union Budget 2017, Budget 2017 Goods and Services tax With GST’s implementation date within sight, the government is expected to release the road map with clear timelines and activities including the readiness of GSTN.

The Budget can be a historic one if it leverages the opportunity of rolling out the next wave of reforms. With India being recognised as one of the few bright spots, the next phase of growth must come from the domestic economy. While it may be early to quantify the long-term benefits of demonetisation, the common man is expecting some relief in the form of rationalised tax rates and slabs to soothe the short-term implications.

With GST’s implementation date within sight, the government is expected to release the road map with clear timelines and activities including the readiness of GSTN. It may take steps to bridge the gap between the current tax rates vis-a-vis the rate in GST, to manage inflation.

Considering the expected windfall gains owing to increased tax revenues, there may be a realignment of tax slabs. An increase in the exemption limit would bring more liquidity, impacting savings, and could provide a much needed boost to the economy. The existing basic exemption limit of R2.5 lakh is much lower as per global standards. Further the current tax slab providing for maximum rate of 30% levied on income exceeding R10 lakh is also on the higher side. The FM could look at reducing the maximum rate and revising the slab.

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However, since the increase in the basic exemption would lower tax collections, the government has to look at widening the tax base. Sectors which are presently outside the scope of the tax net, but generate much higher levels of income/wealth should be brought into the purview.

The focus on the digitisation of the economy and Aadhaar-linked transactions are a step in this direction. The government has already announced special tax rates for transactions through digital methods and special relief in case of payments made through digital methods. This Budget might bring additional personal income-tax incentives for digital transactions. The central ethos of this push towards technology is driven by the need to make systems and processes clearer, faster, simpler and more compliant.

Through digitisation, the automatic exchange of information between countries is also seeing the light of the day and would hugely assist in integrating the financial information of taxpayers.

The government has started to pump the economy by increasing infrastructure spends. Railways, roads, renewable energy and defence might possibly continue to draw its attention.

A continued thrust on the ease of doing business is also expected. Rationalisation in tax rates and effective dispute resolution mechanisms are some of the areas which demand attention.

Furthermore, the evolution and changes over the years in the Dividend Distribution Tax (DDT) coupled with the 30% corporate tax rate have made doing business an expensive proposition. Several issues and ambiguities require appropriate clarification, such that the provisions can be implemented in their true spirit.

As part of other structural changes, Budget 2017 is expected to bring General Anti Avoidance Rules (GAAR) into effect from April 1, 2017. Businesses are hopeful that GAAR would come into effect only in cases of tax avoidance and would not affect genuine business considerations. While amendments have been proposed to cover investments made prior to April 1, 2017, uncertainty around the applicability of GAAR from a retrospective effect lingers.

While the government faces the tricky task of balancing the fiscal health of the economy and also managing expectations of its citizens, businesses continue to hope for policy measures that strengthen the pace of structural reforms.

The bumpy run-up to the Budget owing to demonetisation has increased expectations, while establishing a platform for long-term reforms that can boost growth. The forthcoming budget offers the government a prime opportunity to kick-start this process.

Akhil Bansal
The author is deputy CEO, KPMG in India. Views are personal

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