Economic disruptions in 2018

Economic disruptions in 2018

Two steps forward and one step back! Politics of five years to win elections. Hard decisions are bunched in the first three years, and last two years are SOPs to soften the blow and win over the electorate.

Well, the Indian government undoubtedly took the most courageous decisions during its first three years namely, Demonetisation, GST and Aadhaar, all aimed at crippling the parallel economy and bringing more businesses under the tax net. The impact of the same is already visible in real estate and branded vs unbranded goods. While the short-term pains will be there as the process of adjustment happens, long-term benefits, such as an increase in  cashless activity, more businesses under the tax net and a smaller parallel economy, will be more permanent. These measures have undeniably attacked the black money and its creation. The next logical step would cement the initiatives in the right direction.

The government should focus on streamlining the direct tax structure, besides taking steps to bring vibrancy in economic activities, twin initiatives that it has already started working toward. There is an inevitable need of broadening the direct tax structure, as India is probably the only country in the world with a very small direct tax base, compared to its population. We believe that a major re-haul of the direct tax structure is in order and would be planned for 2018, just in time for the elections, and would be a major plank to woo the electorate.

India's tax revenue as a percentage of its GDP was 16.7% in 2016, compared with 25.4% in the US, and 30.3% in Japan. Taxes that corporations pay account for more than a fourth of the government's total tax receipts in a year. In 2016-17, these collections accounted for almost 29% of the total tax receipts. An overwhelming 80% of the total corporation tax revenue comes from large firms. A widening of the tax base here by increasing the compliance will be very useful and appropriate.

The US has pledged to reduce tax on corporate earnings to 20% from 39%, and the UK is already following similar footsteps. Should India then remain an outlier in the global landscape, where corporation tax rates are progressively coming down to encourage local manufacturing and reduce capital flight? Not a good idea. To avoid the same, corporate tax rate needs to be rationalised from 30% to 25%, and the impact can be minimised by removing a host of exemptions that skew the benefits in favour of large companies. Apex business chambers Ficci and CII are clamouring for a substantial reduction, stressing on the need to reconsider the impact of the Dividend Distribution Tax and the Buyback Tax, which together with the basic corporate income tax, pushes India's overall tax rate for companies well beyond 40%. At the very least, these additional taxes can be removed in this Budget and a clear road map laid down for taking down the tax rate, in line with the government promises in 2015.

It is the personal income tax that should be rationalised the most and the government has been dragging the feet over the same for a long time. A nation of over 125 crore people had only 3.65 crore individuals filing their tax returns in the assessment year 2014-15. India has just 24.4 lakh tax payers who declared an annual income of over Rs 10 lakh, and just 76 lakh tax payers with an income of Rs 5 lakh and above (out of which 56 lakh people are salaried). The numbers show why only 2% of our GDP comes from personal income tax, lowest in the world.

We believe a big rationalisation here will go a long way to get more people into the tax net, along with the efforts to catch tax evaders. How far the rationalisation can go is difficult to guess, but if we go near the following suggested tax slabs, we would be very well off. The personal income tax structure of 5% rate should be widened to Rs 2.5 lakh and Rs 10 lakh bracket, 10% for Rs 10-30 lakh bracket, 15% for Rs 30-50 lakh, and 20% for Rs 50 lakh and above.

The real challenge, however, would be to get more people to pay taxes, where a strong nudge is required and these slabs, would be a nudge in the right direction. The impact on the GDP would be minimal but the sentiment impact would be huge, creating a wave of positive sentiment across the country.

We believe that the lowering direct tax rates, along with infrastructure spending, would be the key disruptions planned for 2018, in preparation for the elections. We just hope that it does not derail the fiscal deficit!

(Mr Padode is Secretary of Centre for Development Education, while Prof Sinha is Chairperson of Centre for Excellence in Banking at IFIM Institutions)

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