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.
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