Hemmed in by a tight fiscal situation, faced with outsize expectations from investors, and with one eye on political messaging, Finance Minister Arun Jaitley delivered a please-all Union Budget on Saturday that was expertly crafted — but which notably refused to undertake “big bang reforms” and postponed major tough decisions to the future. There was something for everyone: foreign investors got clarity, the middle class got tax exemptions, companies were promised tax cuts, deficit hawks were satisfied and infrastructure spending advocates cheered. But the markets’ tepid reaction — the Sensex closed 0.43 per cent higher after being in the red for much of the day — suggested that moderate good news had already been priced in.
The headline news was the changes to direct tax laws - some immediate, and others promised. Jaitley said that the corporate tax rate would be reduced to 25 per cent from 30 per cent over four years; this reduction would be revenue-neutral because exemptions would also be removed. Personal income tax exemptions were also raised, with the maximum claimable exemptions now Rs 4.4 lakh as opposed to Rs 3.8 lakh earlier. An additional 2 per cent surcharge was added to tax paid on income over Rs 1 crore. This would replace the wealth tax, which was abolished. On the indirect tax side, however, the basic rate of service tax was raised to 14 per cent — which ensured that overall the FM raised approximately Rs 15,000 crore more from taxes. Other than that, there were several tweaks to indirect taxes ostensibly to aid the ‘Make in India’ effort, and a promise to roll out the Goods and Services Tax by April 1, 2016..
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The tax proposals, along with the recommendations for devolution of the Fourteenth Finance Commission and a push to reinvigorate infrastructure, meant that the FM delayed the fiscal consolidation path by a year. The fiscal deficit for 2015-16 will stand at 3.9 per cent of GDP instead of the expected 3.6 per cent, but with a commitment to the three per cent target in the medium term. There was no compromise on the 2014-15 fiscal deficit, which came in at the targeted 4.1 per cent of GDP — mainly thanks to expenditure compression, especially on central assistance to state Plans, which was Rs 60,420 crore less than was Budgeted.
Politically, the Budget sought to assuage many groups. Besides the middle class being provided with tax breaks, market investors were given much to cheer about. The application of minimum alternate tax to foreign institutional investors was rationalised; crucial clarifications were provided for transfer pricing-related tax questions; the “permanent establishment” norms were amended to help fund managers locate to India; and the General Anti-Avoidance Rules were further postponed.
But this tax bonanza for the markets followed detailed expenditure proposals that seemed to be targeted towards creating “pro-poor” credibility. A massive “Jan Suraksha” or “people’s security” social welfare net was rolled out. The Pradhan Mantri Suraksha Bima Yojana will pay out Rs 2 lakh for accidental death for a premium of Rs 1 a month; The Atal Pension Yojana will feature government contributing half of some beneficiaries’ premium for five years; and the Pradhan Mantri Jeevan Jyoti Bima Yojana will insure natural and accidental death risk.
The government’s stated desire to move from public expenditure to public investment featured in the ramp-up of spending on railways and highways — the roads ministry in particular was allocated almost three times as much Plan spending, Rs 83,000 crore versus Rs 28,000 crore last year.
A Rs 20,000-crore national investment fund is to be created, which would leverage this equity and issue debt to the private sector.
Tax-free infrastructure bonds are also proposed. Public expenditure was reduced on the revenue account by squeezing transfers to state Plans — meaning that, overall, the States did not gain as much from the Finance Commission devolution as they might have expected.
Another major thrust of the Budget was to attack pools of black money and their holders. In what some saw as a throwback to the past, a draconian legal framework was suggested in which tax evasion abroad could be punished by 10 years’ rigorous imprisonment. Even non-filing of returns would result in seven years. Domestic holding of unaccounted-for money would be addressed, the FM promised, by a new Benami Transactions (Prohibition) Bill, to be introduced in the Budget session itself. Cash sums of greater than Rs 20,000 are to be made illegal in the purchase of immovable property.
Some reforms were promised for the financial sector. After a long wait, an office to manage the government’s debt — a Public Debt Management Agency — was to be set up. The Reserve Bank of India has never been fond of the idea. The Forwards Markets Commission is to be merged with the Securities and Exchange Board of India, to “strengthen regulation of commodity forward markets and reduce wild speculation”. The government would also henceforth exercise “control on capital flows as equity… in consultation with the RBI”. However, the major spadework involved in redoing the financial structure of the country, as suggested by the Srikrishna Committee on Financial Sector Legislative Reforms, was postponed again.
India’s over-fondness for gold, which caused troubles on the external account in past years, was directly addressed by the Budget. The FM proposed to attempt to monetise gold through, among other things, a sovereign gold bond that would redeemable in cash in terms of the face value of the gold at the time of redemption. Existing gold monetisation schemes are also to be revamped.
The finance minister, insisting that the government intended to recover India’s image as a “just and compassionate country”, said that “we need to cut subsidy leakages, not subsidies themselves”. To that end, no legal reductions in subsidy entitlements were proposed. Direct benefit transfers were promised, but the DBT timeline remains open to question given that the Budget numbers show subsidy savings essentially only from a reduction in fuel subsidies – born of both lower prices and the already-achieved end of the diesel subsidy . In line with the thinking articulated by the Economic Survey, the Budget said leakages in the system would be plugged using the “JAM” trinity – Jan Dhan, Aadhar and mobile. To increase the depth of the existing financial system, he asked the postal network, which has over 100,000 touch points, to apply for the payment bank license.
In addressing implementation problems for private-public partnerships, Jaitley gave into demands from the sector and said the government would take a greater part of the risk in such projects. The Budget also proposed a “plug and play” model, where all clearances will be put in place before a project is auctioned. Industry has long argued that clearances and disputes delay infrastructure projects. A law to deal with disputes was also promised, adding to long list of crucial legislation that was mentioned but not detailed in the Budget.
THE BIG MOVES
- Tough law on black money parked abroad
- Wealth tax abolished; super-rich surcharge hike to fetch Rs 9,000 cr
- Rs 24,000-cr more earmarked for railway and road transport
- Gold bonds to help households monetise the metal