The new GDP data brought out by the CSO recently are heartening and point to a better growth story than earlier believed. The expected GDP growth for the current year has been pegged at 7.4%, a big increase from the 5.5% rate achieved in the first half of the year under the old base year of FY05. However, given that the aggregate GDP size has not changed much under the new base year of FY12, and that other indicators point to continued subdued conditions, faster growth can’t be taken for granted, especially as other large economies are still growing slowly. Budget FY16 comes at a time of huge expectations for revival of investments, job creation and faster GDP growth.
As estimated by CII, the infrastructure and manufacturing sectors would require investments of $1.07 trillion and $1.6 trillion, respectively, over the next five years. A key issue facing investors in India is the high corporate tax rate, as compared to other emerging economies. For example, the Asian average corporate tax rate is below 22%, while comparator economies Brazil and China offer rates of 25%. India—with the rate close to 34% after including cesses and surcharges—should lower the rate for domestic companies and unincorporated bodies to 25%, and remove surcharge and cess. The experience so far shows that reducing tax rates widens the tax net and raises the tax-to-GDP ratio.
Further, designated infrastructure projects are eligible for deduction under Chapter VI-A of the Income Tax Act as well as certain exemptions under Section 80-IA. However, the imposition of the minimum alternate tax (MAT) on book profits at the rate of 18.5% deters engagement in infrastructure. The sector should be subject to a much lower rate of MAT and the period for availing MAT credit should be increased from 10 years to 15 years.
The finance ministry must restore exemption on incomes of dividend, interest and long-term capital gains for infrastructure capital funds or companies in certain infrastructure areas, withdrawn in 2006. This could channelise more funds into desired infrastructure sectors. Real Estate Investment Trusts may be exempted from dividend distribution tax for boosting urban development.
Investments are further constrained due to shortage of fund sources. The ongoing task of developing an efficient corporate bond market can be taken forward by extending the reduced rate of withholding tax to foreign institutional investors, and bringing capital gains tax on debt investment on a par with tax in equity instruments or with the same benefits as extended to 5-year fixed deposits. Indian companies should be permitted to issue rupee-linked bonds overseas as well. Another way to increase investible resources is to restore the benefit to individual income tax payers for investments in infrastructure bonds.
The strapped condition of the public sector banks needs to be adequately addressed, particularly given the capitalisation requirements under Basel III norms. The government has announced its intention of reducing its stake in these banks to 51%. It is also possible to create a separate asset management company that could take the burden of distressed loans off the banks.
For job generation, an innovative step would be to link tax rates to the number of workers employed in a manufacturing company. This could be accompanied by a social safety net for workers retrenched due to market conditions. The provision of fixed-term employment to provide flexibility to industry to employ skilled labour for seasonal work should be reinstated alongside.
To raise income levels of new entrants to the workforce, the budget needs to enhance their education and skill capabilities. The budget introduce a clear roadmap to take expenditure on education to 6% of the GDP within three years. Education vouchers for children of households below the poverty line would promote higher quality outcomes.
The Skill India mission can receive a huge boost with service tax and TDS exemption to organisations working on skilling, assessments, and research studies. MGNREGA funds must be deployed for skilling and a fixed proportion should be available for local skill development.
The Budget should also introduce measures proposed by the Tax Administration and Reform Committee (TARC) such as bringing the central boards of direct taxes and excise & customs under a single board with greater autonomy and reducing the cost of compliance. The budget must strengthen platforms for consultations between tax administration and taxpayers so that uncertainties are minimized and tax payment is made more convenient. Such measures would add to investments to expand job creation and take the Indian economy to a higher growth trajectory.
The author is director general, Confederation of Indian Industry