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The Union Budget for 2012-13 will be presented on March 16, 2012. The larger Gross Fiscal Deficit (GFD) of around 6 per cent of GDP as against the Budget Estimate of 4.6 per cent for 2011-12 will be explained away with great erudition. The harsh reality is that the authorities have lost fiscal control.
Cutting back the GFD-GDP ratio by, say, one percentage point in 2012-13 is going to be a herculean task as there are expectations of a big largesse.
India Inc will want a stimulus to put the economy onto a higher growth trajectory while the masses would expect some compensation for the loss of real income because of high inflation.
The latest year-on-year inflation rate is 6.5 per cent but this is no solace to the common man as the level of inflation continues to be high.
The pulls and pressures will render difficult the containment of the GFD. Any substantial increase in the burden on any single sector would cause major problems for the government.
Hence, the strategy should be to spread the burden lightly over the entire revenue stream and also cut expenditure across a broad front.
Direct Taxes Code
Huge iniquities have emerged in the tax system during the past 15 years and there is a need for redressal.
The Parliamentary Committee examining the Direct Taxes Code (DTC) is about to finalise its report. The DTC needs careful examination and a hurried implementation could result in serious problems and as such it would be best to implement it in 2012-13. Nonetheless, some calibrated steps could be initiated in 2012-13.
The Parliamentary Committee is expected to recommend a quantum jump in the basic exemption limit for income tax; this would erode tax receipts. At the same time, inflation has eaten into real incomes and a modest increase in the exemption limits by, say, 10 per cent, needs to be considered.
The enhanced exemption for women should be continued despite its abolition being recommended in the DTC; the DTC appears insensitive to the problem of working women who face additional financial expenditures on taking care of their families.
The basic exemption limit for those over 60 years of age is Rs 2.5 lakh which rises to Rs 5 lakh at the age of 80 years.
Given the longevity in India, it would be desirable to introduce a higher exemption limit for those over 70 years of age as, at that age, they invariably need help because of disabilities.
Higher basic exemption limits for income tax would result in a loss of revenue. The higher exemption limits should be implemented only if the maximum income tax slab is raised from 30 per cent to 40 per cent for those with incomes over Rs 10 lakh. If the oligarchs foreclose the government from enhancing the maximum slab rate, then it would not be prudent, on revenue considerations, to enhance the basic exemption limits.
At present, long-term capital gains from selling assets on a stock exchange are exempt from tax. The Securities Transaction Tax is not sufficient compensation for loss of revenue in the absence of a long-term capital gains tax.
A long-term capital gains tax, say 10 per cent, could be imposed on assets sold on the stock exchanges with a basic exemption limit of, say, Rs 1 lakh. The government should not be intimidated by threats that the stock market would collapse.
The present exemption of Rs 50,000 could be enhanced to Rs 5 lakh but all exemptions should be abolished and the first tax slab could be 10 per cent.
Unlike most countries, India does not have an inheritance tax. There could be an exemption limit of Rs 1 crore beyond which a 10 per cent tax slab could be applied, with progressive increases in the tax for higher assets. There should be no other exemption than one dwelling.
The present exemption in the hands of individuals is a sheer rip-off and the Dividend Distribution Tax is not adequate compensation for the loss of revenue.
Inclusion of dividends in the taxable income of individuals would be resisted by the oligarchs.
Hence, following a different tack, the present dividend distribution tax of 16.5 per cent could be raised to 20 per cent.
Inflation-Indexed Bonds
The government should introduce ‘Senior Citizens Indexed Bonds' to reflect its resolve to contain inflation.
These bonds should be subject to an absolute ceiling of Rs 5 lakh per individual to ensure that this scheme is intended for those with modest assets.
The real rate of interest could be 4 per cent and if the inflation rate is 7 per cent, the nominal interest should be 11 per cent. Again, the principal amount should also be indexed for inflation at the time of maturity.
There are bound to be some concessions in the Budget for 2012-13. As such, the measures outlined above need to be implemented.
In the absence of these measures one can portend loose fiscal control and a resurgence of inflation. One cannot over-emphasise the need for distributive justice.
(The author is an economist. >blfeedback@thehindu.co.in )
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