Run Up to Budget 2022-23: 'Great Expectations'
The ritual plays out yet again. Despite the fact that the annual Union Budget is merely a presentation of statement of account by the central government, there is plenty of excitement and expectation in the run-up to it. Every stakeholder wants the government to take note of their suggestions and accept them. Prime-time debates and discussions in the media add to the atmospherics. For the public at large, there is expectation of some fantastic announcement that would somehow solve their myriad problems.
And yet again, all eyes and ears are on Finance Minister Nirmala Sitharaman, as she gets ready to announce the Union Budget proposals for financial year 2022-23 on February 1. This Budget, fourth for NDA 2.0 as well as her, comes against the backdrop of gradual recovery taking shape in the economy amidst the third-wave of the pandemic.
Before we get ahead with the industry expectations, let us quickly glance through the state of the Union’s finances. As per the latest available data for the current financial year (till November 30, 2021) provided by the Controller General of Accounts, the government’s finances are a mixed-bag of a few cheers and some worries. Of course, the data is provisional and subject to change once the financial year ends on March 31. However, it does give some idea of the direction. For example, against the targeted revenue of Rs 17.88 lakh crore in the Budget Estimates (BE) for 2021-22, the government has managed to generate nearly 76 per cent or Rs 13.58 lakh crore thanks to robust increase in tax revenue collections. But against the targeted revenue expenditure of Rs 29.29 lakh crore, it has spent 61.5 per cent or Rs 18 lakh crore.
It must be noted here that the revenue expenditure of the central government includes the money spent on running the government machinery including salaries and pensions, payment of subsidies, among others. Higher revenue expenditure figures can mean more spending within in order to keep the government running, which is not a good sign.
On the BE for capital expenditure (money spent to create/ acquire fixed assets), the government spent only 49.4 per cent of Rs 5.54 lakh crore for the eight-month period ended November 30. The Union government's fiscal deficit worked out to Rs 6.95 lakh crore or 46.2 per cent of the budget estimates (of Rs 15.06 lakh crore) at the end of November 2021. This is good news as it shows restraint on the part of the government to keep in check the deficit numbers. For the current financial year, the government expects the deficit at 6.8 per cent of GDP or Rs 15.06 lakh crore.
Experts say the government’s finances benefitted from improved revenue collections, both tax and non-tax. "It managed to achieve 73.5 per cent of its budgeted net tax revenue target for 2021-22 in the first eight months of the fiscal. The government usually meets around 50 per cent of its annual tax revenue target in the first eight months," say a senior economic analyst.
Against an ambitious disinvestment target of Rs 1.75 lakh crore for the current fiscal, the government has only managed to raise Rs 9,330 crore. It was hoping to raise at least Rs 90,000 crore from divestment of LIC, but for which to happen before March 31, 2022 the roadmap looks challenging. "The government’s stake sale in Bharat Petroleum Corporation (BPCL) also does not look possible this year. The government therefore may experience a huge shortfall of Rs 1.5 lakh crore in its disinvestment proceeds in 2021-22," says the economic analyst.
On an upbeat note, according to the First Advance Estimates of GDP, introduced in 2016-17 to serve as essential inputs to the Budget exercise, the real GDP or GDP at constant prices (2011-12) in 2021-22 is estimated at Rs 147.54 lakh crore, as against the provisional GDP estimate of Rs 135.13 lakh crore that was released on 31st May 2021. The growth in real GDP during 2021-22 is estimated at 9.2 per cent as compared to the contraction of 7.3 per cent in 2020-21. Real GVA at basic prices is estimated at Rs 135.22 lakh crore in 2021-22, as against Rs 124.53 lakh crore in 2020-21, showing a growth of 8.6 per cent.
Wishing for more
Turning to the Budget wish list, like every year, there are some specific and some generic demands coming in from across the industries and sector-specific associations. For example, rationalisation of income tax slabs -- that will have a direct impact on the salaried class -- has one again been put forth by experts with due explanation. Then there is the recurring issue of how the government should increase its spends on infrastructure and asset creation; should monetise the assets announced under the National Infrastructure Pipeline; should grant infrastructure status to certain sectors, and tax-breaks to more sectors, so on and so forth.
In its pre-Budget recommendations, apex industry lobby Confederation of Indian Industry (CII) has urged the government to adhere to fiscal target of 6.8 per cent of GDP as laid down by the central government itself and expects the government to reduce the overall deficit to 4.5 per cent by 2025-26. CII has urged the government to raise public investment in healthcare to around 2.5-3 per cent of GDP by 2025 from 1.29 per cent currently. It has also batted for speeding up the divestment process of PSUs like LIC, BPCL and Shipping Corporation of India. It also wants the government to put in place a regulatory framework, transparent bidding process, flexible contract management and a credible dispute settlement mechanism to attract private investment in National Monetisation Pipeline (NMP).
Here are some of the major demands that have been put forth with the hope of seeing them in the Budget speech on February 1st.
Taxing expectations
Tax experts have put forth the need for a revision in tax slab rates. As is known, the income-tax provisions dictate that an individual is required to pay taxes based on the slab rates. The highest slab rate (after including surcharge and cess) for income exceeding Rs 5 crore in India is currently at 42.744 per cent. However, tax experts from consultancy firm Deloitte point out that since there has been reduction in corporate tax rates over the past few years, there is a requirement to align individual tax rates with the corporate tax rate. It says, "It is advisable to reduce the highest tax rate of 30 per cent to 25 per cent and also increase the threshold limit for the highest tax rate from Rs 10 lakh to Rs 20 lakh. Therefore, the proposed highest slab rate (including surcharge and cess) can be reduced to 35.62 per cent from 42.744 per cent." Seems like a perfectly reasonable demand. If met, this measure can bring relief to a small group of individuals. As per data from the tax authorities, in 2020 one crore individuals had disclosed income between Rs 5-10 lakh and only 46 lakh individual taxpayers had disclosed income above Rs 10 lakh. Those individuals having annual income above Rs 50 lakh are not more than 1.8 lakh.
Many tax experts have called upon the government to review the personal income tax exemption limit and slab rates. "It will be appropriate if the exemption limit is across the board fixed at Rs 4 lakh and tax rate for the slab Rs 5-10 lakh is considered and fixed at 10 per cent; the next slab may be Rs 10-20 lakh with tax rate of 15 per cent and on income in excess of Rs 20 lakh tax may be charged at 25 per cent. Such a tax regime will help in developing tax culture and true disclosure of income by all," said an association of tax experts and chartered accountants.
As per the latest data, India’s net direct tax collections for the financial year 2021-22 surged 60.8 per cent to Rs 9,45,276.6 crore (as on December 16, 2021) from Rs 5,87,702.9 crore in the corresponding period of 2020-21. The net direct tax collection of Rs 9,45,276.6 crore includes corporation income tax (CIT) of Rs 5,15,870.5 crore and personal income tax (PIT) including securities transaction tax (STT) of Rs 4,29,406.1 crore. Net collections are computed after refunds. Does rejig in income-tax slabs make sense to the FM now? The answers would keenly be awaited on February 1.
Tax experts are also putting forth the idea of introduction of additional deduction towards “work from home” or WFH. The logic is that employees are likely to incur additional WFH-related expenditure, such as internet charges, rent, electricity, furniture, etc., and therefore, employers would need to provide allowances to meet these expenditures. The idea is borrowed from United Kingdom. In the UK, the government has provided a flat rate of GBP 6 per week of tax relief for additional household costs if one has to work from home. "It is recommended that an additional deduction of WFH allowance of Rs 50,000 be given to employees who are working from home," says a leading tax expert.
On the expectations regarding some favourable tweaking in the indirect tax regime, experts propose that the government must indicate or announce expansion of Production Linked Incentive (PLI) schemes to other sectors like leather, laminates and more. Extension of customs duty exemption to key imported goods and setting up of customs dispute resolution forums continue to remain pending from the budget wish list of previous years.
The Federation of Indian Chambers of Commerce and Industry (Ficci) wants the FM to issue a quarterly bidding calendar for the National Infrastructure Pipeline as well as the National Monetisation Pipeline. "This will help the private sector in active participation," it said. Ficci also wants the FM to encourage and promote the development of green technologies across sectors by offering full deduction towards investment/ purchase of green technology assets. It also wants the FM to announce a credit guarantee scheme for rooftop solar projects in order to encourage the residential market to enter into adopting this technology.
Banker's wish list
The Indian Bank's Association (IBA) has put forth its own wish list that if accepted may benefit the consumers directly. For example, the IBA wants a reduction in the lock-in period for fixed deposits (FDs) to be eligible for tax breaks from the current five years to three. Why? Because then FDs can compete with other products on an equal turf. The IBA said in a note to the Ministry of Finance that the tax-saver FDs have become less attractive compared to other financial products. A reduction in the lock-in period would not only make it attractive for the customers, such a move would mean availability of funds to the bank.
The IBA also wants special rebate or additional depreciation for spending on financial inclusion and digital banking. "By making expenditure on IT, banks give benefits to the masses, that is, ease of doing business, digital banking, etc. Therefore, some special incentives in the form of special tax rebate/deduction or additional depreciation over and above actual capital expenditure made on such activities may be provided," the IBA has proposed. It also wants a tax parity between the foreign bank branches and domestic banks in order to encourage foreign banks to incorporate local subsidiaries as desired by the RBI.
The IBA also wants parity in norms laid down for non-performing assets. As per the RBI norms, advances are to be considered as NPA where recovery is not received for a period of 90 days or more, whereas under the income-tax law, the said period is 180 days. This difference results in taxation on interest on loans that have been classified as NPA in line with the RBI norms.
Housing, auto & other sectors
After the adverse effects of the pandemic, the real estate sector has seen steady recovery in the recent past backed by positive government reforms, low interest rates and stamp duty reduction, but still a lot more needs to be done to catalyse the sector. More tax sops and higher relief on the home loan rates will certainly be able to attract more homebuyers and investors to buy property. Developers, therefore, are hoping for an increased limit on tax exemption on housing loans to boost buyer sentiment.
Then, there is specific need for income tax relief on the second home, say realtors. This will benefit homebuyers in a big way and also stimulate the real estate sector. The budget can also support the industry by ensuring reduction in compliance issues. It should also strengthen the existing financing systems to provide liquidity as developers need a rational capital flow to keep up the work process. "We are also hoping for GST reforms as this will reduce overall property cost and push demand for homes, granting of industry status to the overall real estate sector and implementation of single-window clearance, amongst others. We also hope that there will be more announcements to enhance ease of doing business for the developers and are optimistic that the real estate sector is ready for explosive growth in the post-pandemic era," says a realtor echoing the sentiments of a number of developers across cities.
Telecom
There is a need for budgetary allocation for the development of 5G technology including equipment. Further, the spectrum auction this year is likely to also open up the satellite services sector, which already has a lot of focus basis the SpaceCom policy. Investment into space technology along with equipment manufacturing in this space may be an area that is likely to find focus in the Budget as well. It is also likely that the issues relating to the sale of BSNL and MTNL may be a point of contention given that the plans to revive them haven’t really worked well; they have also not migrated their technologies in spite of access to spectrum. Experts want the FM to take note of the fact that more countries are moving towards 5G technologies making it imperative for India to support commercial deployment of 5G networks through a combination of budgetary, policy, and regulatory support, helping startups and enterprises create new revenue opportunities through enhanced communication and connectivity mechanisms.
Automotive
The Federation of Automobile Dealers Association (FADA), the apex body for Indian automobile retailers, has highlighted a few issues that need to be addressed by the FM. It is hoping for the government to introduce benefits of claiming depreciation on vehicles for individuals paying income tax. "This will not only help in increasing the number of individuals filing their IT return but will also help in igniting automobile demand (especially two-wheeler) from individuals and will thus up the GST collection for the government," it argues.
The FADA has also sought a reduction in the GST rate on two-wheelers (2W) to 18 per cent (from 28 per cent plus cess). "It is noteworthy that the 2W is used not as a luxury but as a necessity to travel distances by lower class and rural segment for their daily working needs. Hence the rationale of 28 per cent GST plus 2 per cent cess which is for luxury/sin products does not hold good for the 2W category," it said.
FADA is also batting for a reduction in the GST rate for used cars to 5 per cent (currently 12 per cent for vehicles under 4,000 mm and 18 per cent for vehicles above 4,000 mm in length). It argues that the used car business occupies 1.4 times the size of the new car market, accounting for 5-5.5 million cars per annum with a turnover of over Rs 1.75 lakh crore. "Since authorised dealers account for only 10-15 per cent of this trade, which is also the organised sector thus paying taxes, a reduction in GST will help the industry shift from unorganised segment to an organised segment thereby bringing in more business under the ambit of GST. It would also put a brake on tax leakages," FADA said.
