Demonetisation will have its share of benefits for the economy, apart from boosting government coffers.
Demonetisation will have its share of benefits for the economy, apart from boosting government coffers. While the step was well-intentioned, we cannot overlook its immediate impact on business sentiment and consumption. The Budget is being seen as platform for the government to regain its mojo and spur growth in consumption.
Demonetisation has not only changed the behaviour of the common man towards cashless transactions, it has also led to hoarding of cash and forced people to defer expenditure, resulting in lower consumption and fall in business activities. It is expected that the Budget will place more money in the hands of consumers, resulting in a pick-up in demand.
We heard a lot of “feel good” announcements on New Year’s eve from the Prime Minister. Will the finance minister take a cue from this, and ensure a “feel good budget” for the common man?
Basic exemption limit
Basic exemption limit has remained R2.5 lakh since the last three years; this should be linked to the rate of inflation and be raised every year automatically. Also, the threshold at which the highest tax rate of 30% kicks in should be increased, since a low tax rate encourages higher compliance. This will kick-start savings which will ultimately lead to increase in investment in the system.
Salaried class is the only category of taxpayers honestly paying their share of taxes, rest all are either not reporting or under-reporting. Employees are required to incur various expenses to upgrade their skills/specialisation, viz., books, periodicals, trainings, etc., and interestingly, these expenses are primarily official and not strictly personal in nature. Incentivising this category of taxpayers, a standard deduction which was abolished in 2006 could be re-introduced.
Owning a house
Owning a house is the dream of every individual and our government aims to achieve its dream of ‘Housing for All’ by 2022. Interest subvention schemes under Pradhan Mantri Awaas Yojana is a welcome move, but this addresses the housing concern partially. Given the ticket sizes in cities such as Mumbai, where most houses are priced at R1 crore and above, the tax deduction of R2 lakh for interest paid on home loan and R1.5 lakh for principal repayment is insignificant. The government could, therefore, increase these limits.
The government is walking a thin rope between pacifying the woes caused by demonetisation, reviving the economy and meeting the fiscal deficit targets. Merely 3% of the population files income tax returns and there is a dire need to mop up more taxes.
The capital market needs to contribute more towards nation building. Currently, long term capital gains tax on equities is nil and short term capital gains tax is 15%. The holding period for qualifying as long term is three years in case of debt mutual funds, real estate, but the same is one year for equities. Hence, to bring parity, we can expect that the government may raise the holding period for equity to three years, which would pull up the tax collections for the government and help meet its fiscal deficit targets.
The writer is executive director, Nangia & Co.