Context
In a reasoned and realistic Budget, the Finance Minister missed a couple of tricks while reducing the income tax rate for the first slab and the corporate tax rate for small companies
Author presents us with a brief commentary on various budgetary provisions.
Regressive budgetary measures
- Reduction in tax rate: Author states that although the budget is bereft of any populist measures but one small act of populism still crept in i.e. of reduction in the income tax rate for the first slab from 10% to 5% & it is bad for the following reasons.
- Low tax to GDP ratio: Total tax revenue in India is ridiculously low at 11% of GDP. It is essential that the tax to GDP ratio be increased significantly in order to finance increased public expenditure in the social sectors and infrastructure. How? By following this twin-pronged strategy,
- Ø No reduction in tax rates: Author points out that there should be no decrease in the tax rates
- Ø Making tax evasion more difficult: Secondly, a significantly larger share of national income must be brought under the scope of income tax. Increased computerization, KYC requirements, penalties on large cash transactions will all help in making tax evasion more difficult
- Low tax to GDP ratio: Total tax revenue in India is ridiculously low at 11% of GDP. It is essential that the tax to GDP ratio be increased significantly in order to finance increased public expenditure in the social sectors and infrastructure. How? By following this twin-pronged strategy,
Authors’ suggestion
The government should have kept the 10% tax slab unchanged, and actually introduced a new 5% tax slab for those with taxable income of ₹2 lakh to ₹2.5 lakh
- Reduction of corporate tax rate: Another backward step as per author is the reduction in corporate tax rate from 30% to 25% for companies with an annual turnover below ₹50 crore. Those above the threshold will continue to pay the existing rate of 30%. Author terms this measure regressive because,
- Such a tax reduction provides no incentive to expand. Instead bigger units might be encouraged to split up so as to enjoy the lower tax rate.
Positive budgetary steps
- Providing thrust to agri sector: Budgetary allocation to agriculture and rural sector has been increased by 24%. Agriculture has also been promised increased credit. MGNREGA has been allocated the highest ever budgetary package
- Reform in Political funding: The budget has proposed a ceiling of ₹2,000 on cash donations to political parties, as well as the introduction of electoral bonds for political funding. They need to be supplemented by other steps such as subjecting the accounts of all major parties to auditing perhaps by the Comptroller and Auditor General of India’s office.
