CIRCUIT BREAKER. Four budget ideas the FM can ignore

It’s that time of the year when corporate chieftains, industry groups and think-tanks troop to the finance minister with their budget ideas. The wish-lists are particularly long and inventive this year as everyone prescribes palliatives for the pain inflicted by demonetisation.

But as the finance minister has limited resources to work with, we thought it would be helpful to highlight four bad budget ideas that he can safely ignore.

Instead of tinkering around with the tax slabs every year, why not go the whole hog and abolish personal income tax altogether, is one revolutionary suggestion doing the rounds.

The arguments are threefold. One, as so few taxpayers in India cough up personal tax, it is iniquitous to let them shoulder this burden. Demonetisation has shown us that the unscrupulous will always find ways to evade tax. So why not let the honest folk off the hook too? Two, if income tax is replaced by a flat indirect tax, it would be far easier to collect and no one can evade it. Three, given that the Government is riddled with corruption and leakages, why must we hand over our hard-earned money to it?

But there are practical counter-arguments to all this. For one, in 2016, personal income tax brought in ₹2.86 lakh crore of the ₹14.5 lakh crore taxes collected by the Centre. So if income tax is abolished, the Government will surely look for other ways to make up for this revenue loss. (The hope that it will downsize itself is a pipe dream.) Indirect tax collections (₹7.11 lakh crore) will have to expand by nearly 40 per cent to compensate for a lack of personal taxes. Therefore, the new transaction tax will have to be hefty. What’s more, it is indirect tax and not income tax which is highly iniquitous in the Indian context. Several research studies show that India has one of the widest income disparities in the world. A wealth report by Credit Suisse in 2014 estimated that while the richest 1 per cent Indians controlled 49 per cent of all wealth, the median wealth was as low as $1006. The 2016 Economic Survey noted that those earning less than ₹5 lakh a year make up 98 per cent of India’s population. Such a skewed income distribution calls for a progressive tax structure where the rich are taxed at far higher rates than the poor. Indirect taxes don’t make this distinction.

In fact, demonetisation has just sent out a strong signal that the Modi sarkar has low tolerance for tax evaders. The time is ripe to push home this advantage to improve compliance. A liberal starting slab and a 10 per cent personal tax rate with no exemptions can draw new taxpayers into the net.

Those still on the black money trail recommend that we revive the once-buried banking cash transaction tax (BCTT).

They argue that a 0.1 per cent BCTT on all large cash withdrawals will nudge people to go digital, generate live data on large cash dealings and help the tax department track down black cash hoarders.

But while the BCTT would have been a good idea to implement before demonetisation, attempting it after demonetisation is like setting off a hand-grenade after a nuclear explosion.

By invalidating 86 per cent of all paper currency overnight, and taking its time with replenishing that supply, the Modi government has already done its utmost to force citizens to go cashless. The reams of data generated on high-value cash deposits since November 8 is quite sufficient to keep the IT department busy for a long while too. What’s more, imposing BCTT at this juncture can have a flip side. It can discourage large swathes of the Indian economy which have only recently taken to formal banking, from actively using their bank accounts.

Instead, the Centre must focus on enough enablers in this budget to make pan-India internet connectivity a reality.

With the realty sector taking a hard knock, lobby groups have piped up for a range of sops for the sector. A key demand is that the Government must hike the tax breaks for the interest payout on home loans to ₹3 lakh a year from ₹2 lakh, and allow another ₹1 lakh towards principal repayment. But acceding to this would be a bad idea.

The problem with India’s realty sector is that, over the years, it has dedicated itself almost wholly to meeting the aspirations of the urban elite. Blanket tax breaks on home loans have encouraged this trend.

Today, even as the top four cities in India report huge unsold inventory, the country still faces an urban housing shortage of nearly 19 million units. This paradoxical situation arises because the bulk of the supply is swanky homes costing upwards of ₹50 lakh, while much of the demand is for dwellings costing a modest ₹5 lakh to ₹10 lakh. This is all that India’s economically weaker sections can realistically afford.

This is not all. The liberal tax breaks for home loans also encourage the urban elite to allocate a disproportionate part of their surplus to property investments. With a huge EMI to pay off every month, how will savers have any surplus to park in equities, bonds or mutual funds?

If the Modi sarkar is keen to shift citizens away from physical to financial assets, it must stop doling out big tax sops to real estate. What we really need to make housing affordable is incentives to builders for genuine low-cost housing, and targeted tax breaks on home loans below ₹15 lakh.

Angel investors and entrepreneurs are unhappy that, after announcing its Start Up India, Stand up India programme with much fanfare last year, the initiative itself has been slow to start up. There is a clamour for speedier approvals and stretching the tax holiday for startups from the present three years to seven years. There’s a demand for exemption from Minimum Alternate Tax too.

But the problem with extending liberal tax concessions to a fledgling business is that such concessions erode its ability to compete from the very outset. India has quite a few instances of sectors that have chugged along on the strength of tax concessions for decades and are still loath to give up the benefits.

Instead, the Centre can look to ease the restrictive rules for startups to gain DIPP recognition. Presently, registration and tax breaks are available only to startups that are less than five years old, with less than ₹25 crore turnover, which are funded by SEBI-registered investors, with ‘innovative technology’ and a valid patent. A wider range of new ventures from services and non-technology businesses should be eligible to apply for the startup tag.

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