Right time for path-breaking Budget

Budget 2017-18 will be path-breaking. For one, it will be presented on February 1 instead of February 28 as was the practice. For another, this will be the first unified central budget, merging the railway budget with the main budget.

Besides, this budget will do away with the distinction between planned and non-planned expenditure. It is the first budget after the historic demonetisation move. It will also be the last budget before the introduction of the Goods and Services Tax (GST), which is itself a path-breaking fiscal reform.

Paradigm shift Prime Minister Narendra Modi, in a recent speech in Gandhinagar, reiterated his government’s commitment to a paradigm shift “from relationship-based governance to system-based governance, discretionary administration to policy-based administration, random intervention to technological intervention, favouritism to level playing field and informal economy to formal economy”.

The Budget should contain concrete proposals on each area of the shift indicated in the Prime Minister’s medium-term vision. Specific budget proposals should be do-able in a time-bound manner and bely the general perception of the Government being long on commitments and short on achievements.

The war against black money, corruption, counterfeit notes and illegal activities has reached a critical phase. The trick of providing carrots to unscrupulous tax evaders through voluntary disclosure schemes has not been very successful.

Despite facing hardships due to demonetisation, ordinary people continue to support the initiative in the hope that the Government will punish tax evaders severely.

The Budget should pursue follow-up measures to expeditiously book tax evaders as well as to normalise the distribution of new currency notes so that the adverse impact of demonetisation on GDP growth is contained.

Cashless transactions There is a great opportunity for the Government to give a big push to cashless digital transactions (CDT). Although several measures have been taken, they are not enough since most of them are works in progress.

A comprehensive agenda has to be included in the budget as suggested by the Watal Committee. Digital transactions should be incentivised and cash transactions dis-incentivised to enthuse users to make the shift.

There should be clarity on several issues relating to CDT. Who will bear the cost of providing the reliable, robust and secure back-end infrastructure necessary for CDT? Can telephone operators guarantee wide area network and last mile connectivity? Will speedy digital services be available seamlessly, 24x7? How will interoperability amongst service providers, particularly e-wallets, be ensured? Who will provide customer protection and what type of mechanism should be put in place to redress customer grievances? How will cyber security be ensured?

Most CDT service providers fail on more than one of the basic cyber security criteria such as privacy, integrity, availability, confidentiality, non-repudiation and customer protection. Who will be responsible for spreading digital literacy and user awareness?

Banking cash transaction tax, as suggested by the Shome Commission, is not a good idea when five States are going to the polls. The Government can make it mandatory for all business-to-business (B2B), business-to-government (B2G), business-to-customer (B2C), government-to-business (G2B) and government-to-citizen (G2C) transactions to be in the digital mode.

For all consumer-to-business (C2B) transactions, payments through cash may be allowed up to a limit, say ₹ 5,000, to meet petty expenses. If C2B payments above ₹5,000 are mandatorily done through CDT mode, the demand for cash withdrawal will automatically decline.

Prelude to GST The implementation of the Goods and Services Tax (GST) cannot be delayed too long. This year’s budget is essentially a prelude to the GST roll-out.

The finance minister may have to tweak tax proposals in order to make the implementation of GST in 2017-18 seamless.

The Government is expected to garner additional revenue of at least ₹1 trillion in 2017-18 from unaccounted income likely to be detected following demonetisation. This would help achieve fiscal consolidation this year. As there is not much threat to fiscal consolidation due to higher revenues after demonetisation, there is elbow room for the Government to provide some tax relief to both salaried citizens and the SME sector.

The Government may consider hiking the tax exemption limit by at least ₹50,000 to ₹3 lakh. The income tax benefit under Section 80C of the IT Act may be enhanced by another ₹50,000 to ₹2,00,000.

Alternatively, the income tax rate may be simplified — say, no tax up to ₹5,00,000; 10 per cent for income exceeding ₹5,00,000 up to ₹10,00,000; 20 per cent for income exceeding ₹10,00,000 up to ₹20,00,000; and 30 per cent thereafter without any exemption. Corporate tax and other indirect taxes may be revamped keeping in view GST requirement.

In the age of zero-based budgeting, there is no scope to allocate resources on an incremental basis for schemes that are either malfunctioning or failing to fulfil their objectives. The multiplicity of programmes for rural people is perceived to be a big drain on resources. Wherever possible, schemes should be merged and resources pooled to be spent on well thought out rural development programmes.

However, beneficiaries should not be excluded from any programme. Spending on rural infrastructure needs to be increased significantly. The ultimate objective of inclusive growth is to provide gainful employment to the marginalised. They must earn their livelihood and contribute to GDP growth rather than look forward to government subsidies for their subsistence.

The writer was Principal Adviser and Head of the Monetary Policy Department, RBI

COMMENT NOW