Current crisis calls for a revised Union Budget

KS Ravichandran | Updated on May 27, 2020 Published on May 27, 2020

The provisions included in the Budget fro 2020-21 are insufficient to boost growth in light of the Covid-19 pandemic. Focus should be on stimulating economic activity and creating employment

Regulators are compelling companies to compile and furnish information to stakeholders through an impact study arising from the uncertainties introduced by the Covid-19 pandemic. The Securities and Exchange Board of India, in its Circular dated May 20, 2020, has stated that listed entities are encouraged to evaluate the impact of the Covid-19 pandemic on their business, performance and financials, both qualitatively and quantitatively, to the extent possible and disseminate the same.

The Budget for 2020-21 was presented with the slogan “Aspirational India”. The Union Finance Minister, in her Budget speech on February 1, 2020, stated that India’s efforts to elevate poverty has resulted in raising 271 million people out of poverty in the decade between 2006 and 2016. Our economy was hailed as the fifth-largest economy in the world. The Budget was hailed as a paper that had chalked out a growth trajectory. But the Covid-19 tragedy has made everything topsy-turvy. It is no longer in doubt that 2021 India’s GDP will see a negative growth.

Current provisions

The Budget announced the elimination of the dividend distribution tax. It is almost certain that Covid-19 has eliminated distributable profits of several companies. This proposal may not matter much in the current year and next year, for sure. The Budget also contained a proposal to offer a concessional tax rate for electricity generation companies. In view of the prevailing industrial scenario, with many industrial consumers under lockdown, even with partial opening of operations there will be only glut of electricity and the tax proposal may not attract many players. Instead, the proposal must be made applicable to all existing electricity generating companies in order to make them tax-efficient in addition to making it available to additional capacity creators.

Yet another proposal is with reference to investment coming from the sovereign wealth fund of foreign governments. The Budget proposes to grant 100 per cent exemption to interest and dividend capital gains tax for those funds.

Governments across the globe are planning to print notes unmindful of the deficit financing. Venezuela has sued Bank of England for gold to help it fight the situation brought about by Covid-19. Therefore, the chances of foreign governments routing sovereign wealth fund in a major way attracted by this tax exemption proposal appear to be very negative.

There is a proposal with respect to start-ups increasing the number of years within which the tax holiday could be availed by start-ups, and increasing the turnover threshold too. Start-ups are entitled to a deduction upto 100 per cent of their profits for three consecutive assessment years. Though it is a welcome move, there won’t be any profits unless the project is highly competitive and/or innovative. There is a proposal to increase the turnover limit from ₹1 crore to ₹5 crores with respect to audits of small traders, shopkeepers. This proposal aims to reduce the compliance burden on such businessmen. Though it is a welcome step, in the current scenario, if traders achieve this turnover, that in itself will be a great thing.

Another proposal was extending the tax holiday for one more year to developers of affordable housing projects. If “housing for all” is the objective, government must invest in projects to add millions of houses quickly in an year or two. This will enable them to live peacefully and permit them to spend money for improving their lifestyle. Unless the government infuses capital and announces such projects, many affordable housing schemes may not be springing up across the country. Businessmen are concerned first about demand and second about profits and third only about taxes on profits.

Changes to be made

A revsied version of the Budget may consider the following five proposals:

Captial infusion is needed; there must be huge announcements for infrastructure development, including investing in affordable housing schemes and major investments in the Jammu and Kashmir region and North-Eastern India.

Tax rate cuts must be announced not only for new projects but also across all the sectors and for all projects, current and new. In the current scenario, the government must look at enabling economic growth for the existing efficient enterprises. On the indirect taxes side too, tax rate cuts will augment consumption.

For financial inclusion, meet the financial needs of farmers and traders and the MSMEs, offering them loans at about 2-3 per cent more than the reverse repo rate from time to time, so that money is made available through the normal banking channel to the large sections of the society that create economic activity and which constitute the entire supply chain, from farms to warehouses, transportation and traders who offer the last-mile connectivity to consuming households.

Foreign direct investment (FDI) is needed to bring large projects, especially in view of the widespread discussion about manufacturing facilities moving away from China. FDI from China need not be looked at with jaundiced eyes. There may be even FDI in kind which happens through an entire industrial undertaking, including plant and machinery, including upto 50 per cent of the existing workmen in those undertakings.

Last but not the least, the government must put money in the pockets of marginalised sections of the society to give them ‘roti, chawal and dal’ in a respectable manner, unmindful of deficit financing.

In the light of the current scenario, which is likely to have its own impact for at least the next 2-3 years, the government must bring out a revised Budget in order to make the proposals relevant. Stimulating economic growth is essential to create employment and remove frustration in the minds of people. Providing short-term support to people by direct benefit transfers must be ably supported by employment creating projects.

The writer is Managing Partner, KSR and Co

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Published on May 27, 2020
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