Jaitley means business

R Srinivasan Updated - March 06, 2015 at 05:07 PM.

Riding on the back of an economic revival, the Finance Minister lays the groundwork for a virtuous cycle of investment and growth

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This is no ‘Big Bang’ Budget. There are no sweeping concessions to industry, no hand-outs for the middle class and there is no largesse for the poor. But in his first full Budget, Finance Minister Arun Jaitley has lit a string of fuses, which, when they explode, will resonate in years to come.

GST on the horizon The first of these delayed-action detonations — with possibly the biggest bang — is the Goods and Services Tax. After a decade of dithering, the final deadline for implementation has been set: the start of fiscal year 2016-17.

By replacing the bewildering assortment of levies and exemptions with a single tax, GST will create one all-India market with a uniform levy for most goods and services. This will dramatically ease doing business, cut transaction costs and radically alter the indirect tax landscape. By most estimates, this will add a full percentage point to GDP growth.

The second is the plan to cut corporate income tax from 30 per cent to 25 per cent over four years. Simultaneously, Jaitley has promised to end the array of exemptions and concessions.

This will lead to a more transparent tax code, and put India’s corporate tax rate in the ballpark with the global average of 23.8 per cent.

Coupled with the further deferment of the reviled General Anti Avoidance Rules by two years, and a promise to implement it only from April 1, 2017, Jaitley has removed a major bugbear for foreign investors. Along with a major change proposed to bankruptcy laws — ease of doing business includes ease of exit, too — this will improve India’s ranking on this front.

Wealth tax killed The third is the decision to abolish Wealth Tax. In 2013-14, wealth tax collections were ₹1,008 crore, which puts the total assessed wealth at just ₹20,000 crore!

“Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax,” Jaitley asked.

Instead, he will tax those with a taxable annual income of over ₹1 crore an additional 2 per cent. This will not only ease compliance and boost the mop up, it will also bury the socialist angst of the past.

The fourth is the clear move towards federalism. States will get ₹5.24 lakh crore out of the Centre’s revenue receipts in 2015-16 against the ₹3.38 lakh crore they got in 2014-15. Along with grants and transfers, they will get to spend 62 per cent of Jaitley’s collections. Fiscal feudalism will be consigned to history.

More public investment The fifth is the recognition that public investment will have to lead the way, and that private investment, particularly in the infrastructure space, will flow in only when the currently broken Public Private Partnership (PPP) model is fixed.

Jaitley has addressed this in a number of ways. He has stepped up public spending on infrastructure: it is slated to cross ₹70,000 crore in 2015-16. A new National Investment and Infrastructure Fund gets ₹20,000 crore, there will be tax-free bonds for infrastructure, and PPP deals will see the government underwriting much of the risk.

In the short term, this will mean a higher fiscal deficit. The gap will rise to 3.9 per cent of GDP, the lowest since 2008 but higher than the 3.6 per cent target set by his predecessor. But Jaitley will deviate only a little, and for a short while. In three years, he intends reducing the fiscal deficit to 3 per cent of GDP. This, with moderate inflation — the target for the coming year is 5 per cent, lower than the RBI’s 6 per cent — should pave the way for moderation in lending rates, spurring consumption and investment.

Entrepreneurship boost The last is a focus on fostering entrepreneurship. From the announcement of an innovation fund to ₹20,000 crore for the creation of a ‘Mudra Bank’ to refinance lending to the MSME sector, Jaitley is betting big on the entrepreneur creating a virtuous cycle of growth and job creation.

But these future pay-offs come at the cost of some present pain, particularly for the salaried tax payer, who has only got nominal increases in healthcare and transportation allowances.

There are no grand hand-outs for the poor, though MNREGA allocations have been upped. Add the increase in Service Tax to 14 per cent and the increase in general excise duty (by rounding off education cess), and this Budget will be a difficult political sell for the BJP.

Published on February 28, 2015 18:10