Satya Poddar: An inclusive and reformist Budget

Against the backdrop of the uncertainties caused by the geopolitical changes in the US and the UK and the short-term upheaval caused by demonetisation, the Budget proposals provide the right policy drivers and chart a fresh course for India’s journey to its potential growth. 

The most significant themes that underline the Budget proposals are uplifting the poor, zero tolerance for black money and promoting digital economy for a more transparent, formal economy. The Budget makes substantial allocations for the rural, agricultural and allied sectors, women and child welfare, MGNREGS and for the housing sector. To increase transparency in electoral funding, a cap of Rs2,000 per donor has been prescribed for cash donations to political parties. The limit of Rs3 lakh has also been placed on all other cash transactions, aimed at checking black money.  

Having already implemented two tectonic changes, that is, the Constitutional Amendment for the implementation of GST and the demonetisation, this Budget shied away from announcing any other major structural reforms. 

Both demonetisation and GST complement the government’s efforts to check black money. While the demonetisation drive has helped in unearthing black money, GST can play a pivotal role in preventing the resurfacing of it. The demonetisation process has only just begun. The transfer of cash to the bank accounts is only the first step. The government would be initiating investigation on the sources of the bank deposits in the coming months.

For reaping the benefits of demonetisation, the government would need to take certain additional measures. Under GST, the automated matching of invoices for transactions will make it difficult for the taxpayers to escape the radar of government scrutiny. However, indications are that about one half of the total transactions will be outside GST due to the many exemptions and exclusions. Such exempted goods and services run the risk of becoming a cesspool of black money. 

The Economic Survey had flagged the Universal Basic Income (UBI) as a new initiative, which would be a better targeted scheme of providing support to the poor.  While UBI did not find any mention in this Budget, the Economic Survey has already has already sown the seeds. Tax exemptions, whether under GST or direct taxes, are an inefficient and expensive means of helping the poor. The government could broaden the GST base and use a part of the additional revenue to fund a pilot UBI.  A cash transfer of Rs2,000 per annum per head to those below the poverty line would have a cost of less than one-half of one per cent of GDP.  Even at this modest level, its benefits to the poor would far exceed those under the exemption system.  

The finance minister has chosen not to relax the corporate tax rate for companies other than the SMEs with turnover below Rs50 crore. If GST is implemented efficiently, the companies will benefit substantially through removal of cascading tax on their investments. The benefit of GST will far exceed the benefits from reduction in corporate tax rate. 

The Budget has introduced many technical changes to provide relief to the taxpayers and improve ease of doing business. Removal of capital gains tax from the indirect transfer of assets for FIIs is a step in the right direction. 

Consistent with its focus on improving tax compliance, the government has chosen to provide tax relief in the segment of Rs2.5-5 lakh instead of increasing the basic threshold, as was the popular expectation. However, a 10 per cent surcharge for taxpayers in the Rs50 lakh to Rs1 crore could have been spared. 

Overall, it is a responsible Budget, but still a work in progress which focuses on consolidation of the radical reforms. 

The writer is advisor, EY