The Union Budget in India usually has five objectives:
(i) Presenting the annual
accounts of the previous year Union Government for consideration and approval
of the Parliament.
(ii) Presenting the policy
roadmap for the future. This usually is a political statement.
(iii) Presenting the budget
of the Union government for the following year. This includes the budget for
various revenue and capital expenditure of the union government, allocation of
resources to states and union territories, and sources of revenue to meet the
budgeted expenditure and allocations.
The key monitorable in this exercise usually is the difference
between the revenue and expenditure. The excess of budgeted expenditure over
budgeted revenue is termed as fiscal deficit.
This deficit is met by the union government through borrowings
from various sources. Changes in provisions of various tax laws are also
monitored closely as it impacts the tax liability and compliance requirement
for the tax payers.
(iv) Presenting an action
taken report for the previous budget proposals.
(v) Presenting a medium
term fiscal road map in terms of the Fiscal Responsibility and Budget
Management Act 2003 (FRBM Act).
Various stakeholders in the economy look forward to the budget
with a great sense of anticipation. However, their interest is usually limited
to the third objective listed above.
The rich eagerly wait for the budget to get fiscal incentives to
make investments and find loopholes for evading taxes. The middle classes wait
for some duty concessions on items of common use and lower taxes on salary etc.
The poor would anticipate more subsidies and welfare schemes.
The scope and importance of Union Budget has diminished
materially over the past two decades.
- Initially the changes in tax rates were made only through the Finance Bill which is part of the budget exercise. However, many springs ago the government assumed the power to change the rates of excise etc through notification outside the budget. Subsequently, the GST subsumed most of the indirect taxes and the power to alter GST rates has been exclusively vested in the GST Council. The Union Budget has no role to play in GST rates now.
- The boundaries for rates of customs duty are now mostly set in accordance with the WTO agreements. The union government can change these rates to safeguard domestic industry from unfair pricing by overseas suppliers or to stabilize the domestic prices in times of abnormal supply shocks. These changes could be done whenever a need arises. The union budget has little role to play in this.
- Post implementation of the 14th Finance Commission recommendations, the onus to implement a large number of welfare schemes has been transferred to the respective state government.
- The petroleum products' pricing has been mostly deregulated and the budget provides no subsidies for the transportation fuel now.
- Most of the public sector enterprises, like NHAI, Railway Subsidiaries, Oil & Marketing companies now raise resources directly rather than through the budgetary support.
This year particularly, the importance of budget is even lesser,
because -
(a) The corporate tax
rates were restructured materially in August 2019 and therefore no further
change in corporate tax is anticipated.
(b) The government
has announced a National Infrastructure Pipeline (NIP) of Rs1.02trn in December.
This obviously takes out almost all major projects from the union budget.
The budget anticipations are therefore mostly focused on the
following three points:
(1) What tax concessions
the finance minister would provide to individual tax payers to spur the
consumption demand in the economy. Remember, the personal tax revenue is less
than 1/6th of the total budget revenue.
(2) How the finance
minister will manage resources to meet the requirements for higher capital
expenditure to stimulate the investment demand. Raising tax rates or imposing
additional levies may not be preferred options this time. The condition of
telecom sector also does not augur well for raising meaningful revenue from
sale of spectrum. Therefore, aggressive disinvestment, market borrowings,
overseas borrowing and higher tax revenue through stricter compliance may be
some of the preferred sources of additional revenue.
(3) How much relaxation on
FRBM fiscal deficit is availed. The general view is that the finance minister
may choose to aggressively breach the fiscal deficit limits and allow higher
spending by the government alongside lower taxes.
After listening to a lot of market experts, industry captains
and reading many reports outlining market expectations from the budget, I am
reminded of the anticipation and excitement the New Year Eve entertainment
program of the national telecaster Doordarshan (DD) used to stimulate amongst
middle class households during 1980s.
While the elite (there were only a few back then) partied the whole
night and poor shivered in bitter cold, the middle classes would usher the New
Year sitting in front of their TV sets, listening to the famous Punjabi singer
Gurdas Mann and watching some sundry comedians trying hard to make people
laugh.
Tax on long term capital gain (LTCG) arising from sale of
publicly traded equities is one such stories (like Gurdas Mann's performance)
that is served almost every year. If my message box is a benchmark, at least
half the market participants are discussing and worrying about it, once again.
Insofar as I am concerned, I shall hear the finance minister for
objectives (ii) and (iv) mentioned at beginning of this post.
I am keeping no expectations for tax concessions, as I am
convinced that the effective tax rates for me have bottomed few years ago, and
these should continue to rise for next many years. Any concession, if at all,
allowed this year will be ad hoc and perhaps misleading.
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