Pre- Budget Expectations: Some Smart And Sharp Planning Is Needed
India and Finance Minister Nirmala Sitharaman, both find themselves between a rock and a hard place as we approach the Budget. I think we can all agree that 2020 has been one of the most exceptional years on many fronts for the country. Covid-19 in a way acted as a sharp mirror for the country as all of our existing problems got amplified. The country saw a massive migrant crisis and the slowdown in the economy has meant many people got inevitably pushed below the poverty line. At the same time, internet dominated sectors like Ed-Tech, Fin-Tech, online gaming, fantasy sports have seen a huge rise in acceptance and adoption among people as smartphone and internet penetration both increases in the country.
As such, when the Finance Minister claimed that the budget would be unlike anything we have ever seen, I tend to believe that. I truly hope the budget will have some much needed yet innovative solutions to meeting the revenue shortfall. Early figures have predicted the Government will run up a shortage of 7 lakh crore in the present fiscal year. With declining tax revenues and ramped up spending on a public vaccination program, the finances of the country are in a tricky mess. I do not envy the job of the Finance Minister. With the whole country rightly wanting relief in taxation as well as increased spending to lift the economy, the conundrum is real. The pressure to maintain fiscal discipline under the Fiscal Responsibility and Budget Management Act makes it difficult for the Government to completely let go and borrow.
In such a case, the Executive needs to be smart about how it uses money and how it raises money. A lot can be achieved through synergies by combining goals of multiple departments that can help with overall savings for the country.
My budget expectations for raising revenue:
Tax revenues have taken a hit this year because of declining corporate revenues as well as an increase in job losses. GST collections for the first half of the year have been negligible. In such a case, the Government has to be innovative when it comes to raising revenues.
A report published in Dec 2020 puts the total income tax claims stuck at various courts at Rs. 4.96 lakh crores. The amount for Service Tax and Central Excise is almost the same at Rs. 4 lakh crore even after the introduction of GST.
The Government has launched schemes like the Vivad se Vishwas scheme for Income Tax which led to a realization of Rs. 83,000 crore as of December. However, the amount settled vis-à-vis the total pending amount suggests the scheme has not found many takers. Around 20% of the pending cases have been settled under the scheme. The tax department does not have a good record when it comes to litigations, especially at the High Court and Supreme Court. In such a case, the Income Tax Act needs to be modified to put a limit on the number of appeals that can be made in case of taxes. The Vivad se Vishwas scheme possibly needs an extension and some more sweetening to ensure a higher collection under the scheme.
Apart from this another area of tax that can be strengthened is in recovering arrears of tax. Not all of this tax is presently under dispute. Reports put this figure at Rs. 1.9 lakh crore in 2019. Certified demand not getting recovered by tax departments is a failure and the focus of the Government should be on assessing tax due write offs instead of pursuing litigation. Tax arrears which can be legally recovered should be put in focus in 2021 and administrative focus should be on the same. Focus should be on revenue leakages from the Customs department. A voluntary disclosure scheme for black money should also be introduced for a limited period of time.
The internet is one of the biggest democratizing forces in our country today. It has positively transformed many sectors in the country. At the same time, the explosion of the internet has left India extremely vulnerable to cyber attacks, phishing scams, and data breaches. The recent furore over popular messaging app WhatsApp’s privacy policy explains the huge gap in terms of knowledge and legislation in the country when it comes to data security and privacy. Data breaches in 2020 happened to big names in the country, like Twitter, Unacademy, BigBasket, Mariot among others. There is at present no penalty system in the Information Technology Act. Adding an element of penalty for data breaches will force companies to take cyber security a little more carefully and also net a small sum to the Government in terms of fines. The fines can be in line with European GDPR regulations.
The Indian cryptocurrency market has seen a boom after the Supreme Court struck down a banking ban by the RBI. Till the time the country has clear policy action in terms of cryptocurrency, the taxman will do well to decide a blanket rate for taxing cryptocurrency gains. A moderate tax of 20% can be introduced to tax gains made in cryptocurrency.
Budget expectations for some smart spending:
The demands for easing personal income tax rates is not misplaced. Job losses across the board have hurt the Indian middle class and their consequent spending. Rationalizing tax slabs will help ease a lot of pain for people dealing with pay cuts or job losses. The no tax limit with rebates currently stands at Rs. 5 lakh. This can be raised to Rs. 10 lakh and the slabs rationalized above. This will provide relief to a majority of taxpayers who then have more disposable income to spend, thus reviving the economy.
One way the Government can reduce the spend it does on MNREGA without compromising on the welfare it provides to people is by giving part payment of MNREGA spends in grain. The Food Corporation of India granaries are overflowing with rice, wheat, pulses, sugar that are procured for both public distribution and political compulsions. The buffer stock is several times higher than required levels. The recipients of MNREGA are consumers themselves, availing ration from public distribution systems. To ensure nutritional security, the Government can give them say Rs. 20 of the daily wages with dry pulses, rice or wheat. This will reduce the pressure of stocks from Government warehouses and save FCI the cost it incurs on grains. It will also ensure people have more food to eat. It will directly save the spending the Government makes under MNREGA without diluting the quality. This suggestion was made as a part of the Swaminathan Committee reports and I find it has a lot of merits, especially now, given our buffer food stocks and strained finances.
The return of migrant labour in villages has meant an increase in the MNREGA demand but a lack of projects has meant the labour has not found work. The Government can club social goals while adding projects for MNREGA. In 2020, several rainwater harvesting projects were undertaken across the country. In 2021, the focus can be on building better schools for children across the country. The condition of schools is quite dismal across states. Only 60% of schools across the country have a boundary wall. 56% of them have electricity. Only 67% have a girls toilet. These infrastructure changes can be brought about through MNREGA. To provide equal rights to the disabled, public access buildings have to have ramps among other infrastructure. This too can be achieved with MNREGA.
There are many uses for funds in a country like India. However, some smart and sharp planning by the Executive can ensure freeing up of funds and reducing the strain on our finances. I sincerely hope that bad policy doesn’t exacerbate the situation. The country needs innovative solutions for Covid. As the Finance Minister said, this is a budget like no other. With some creative solutions, I really hope it will be.
