Vijay Kumar Gaba: Union Budget 2021

One of the distinct childhood memories is about the Uncle, who used to visit foreign countries for work almost every year. After every foreign visit, he would host a family dinner. At the gathering he would explain the difference between heaven (Europe and USA) and hell (India). He would make every adult regret for taking birth in India and make every child aspire to settle abroad.

We (me and my brother) were usually not interested in what Uncle is saying. Our interest was limited to the last act – opening of goodies bag post dinner. He would very generously distribute the “gifts” he had brought from “foreign”. These gifts would invariably include – bathroom sleepers, shaving and dental kits, cosmetics and writing instruments picked from the hotel room he had stayed and flight he had travelled; bottles of perfume; some clothes; small toys; and souvenirs, mostly bought from dollar stores (this I know in hindsight after travelling myself). Three essential things were bottles of liquor bought from duty free shop, a wrist watch and some electronic gadget (camera, oven, juicer, VCR etc.). These items he would offer to sell. (In hindsight I know that he would recover the cost of his entire trip and gifts by selling these items.)

Presentation of Union budget, every year by the finance minister, always reminds me of the generous uncle. A great build up before the budget presentation; a long speech; a strong feeling of regret for being Indian middle class; distribution of some goodies for the poor; and higher taxes to meet the higher expenditure. Since the dream budgets of 1996; the same story has been repeated for past 25years. Almost every time, people end up disappointed and disillusioned after the fine print of the budget are explained to them the next morning.

Notwithstanding the outcome, the charade of pre-budget shows, writings, representations, expectations and analysis is repeated enthusiastically. Hopes are rekindled only to be shattered. This year is no different.

The grim reality of Union Budget 2021 is that the government is terribly short of resources and extraordinarily high on promise. To meet the promise, additional resources would need to be raised. The government knows it well. The businesses know it even better. Rest all (consultation with stakeholders etc.) is the Uncle’s dinner to sell the duty free liquor and gadgets.

For those who are expecting the finance minister to take out some bazooka from her tablet (this year budget is digital, hence no briefcase), I have stated this earlier also and would like to repeat:

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.

· The corporate tax rates were restructured materially in August 2019. It would not be reasonable to anticipate any further concessions in corporate tax.

· Higher energy and food inflation may warrant some concessions in the personal taxation, especially for the smaller tax payers. Inflation scaled increase in basic exemption limit and standard deduction may be considered. But this will be subject to resource constraints.

· The government has announced a National Infrastructure Pipeline (NIP) of Rs1.02trn in December 2019. This proposal was strengthened through various stimulus packages announced during the course of 2020. This obviously takes out almost all major projects from the union budget.

· Disinvestment of public sector undertakings a continuous process. Though a provision for receipts from this head is made in the budget, there is no evidence of any correlation with the actual disinvestment proceeds and budget provisions, in past 30yeras of disinvestment process.

· Telecom spectrum auction and bank recapitalization allocation are other two key items watched closely. Again, in past 20yrs, there is no evidence of any correlation between the actual allocation and budget provisions.

Analysis of various reports indicates that market participants may be expecting the following from Union Budget 2021:

(a) Significantly higher government expenditure, especially on infrastructure building. Setting up of a specialized development finance institution (DFI) is also one of the key expectations.

(b) Additional tax concessions to middle classes especially salaried people.

(c) Concessions for housing sector, especially higher interest rate subvention; higher cut off limit for definition of affordable housing; additional concessions for developers of affordable housing projects including extension of tax holiday beyond March 2021.

(d) Review of taxes on investment (STT, LTCG, Dividend Tax)

(e) Continued suspension of FRBM till FY24.

(d) Fresh (higher) allocation for bank recapitalization.

(e) Cut in excise duty on automobile fuel.

(f) Some progress on Bad Bank formation.

The fears of market include the usual wealth tax, estate duty, additional tax on tobacco products.

Clearly, the expectations this time are running quite low. Just for the sake of a good omen, I would also expect the following from the finance minister:

(1) Make capital gains (Long term and Short Term) tax rate uniform across all asset classes. This will allow rationalization of asset allocation process by removing tax arbitrage between asset classes.

(2) Formula to link the basic exemption with some objective criteria (e.g., inflation, per capita GDP, house price index, education and healthcare expense per household as per latest NSSO survey, etc.) This will make the taxation structure more equitable and end the need to speculate over exemption limit before every budget.

(3) Refrain from imposing additional taxes and cess to cover the cost of Covid vaccination and stimulus.

I would however be not disappointed if FM refuses to oblige me by meeting any of my expectations. I know this is an exceptional year and she has many strings to balance.

Vijay Kumar Gaba

Tuesday, January 19, 2021

The generous uncle