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Budget 2018 - Contracting revenue trend puts Mr Jaitley in Tight Corner

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DECEMBER 28, 2017

By Shailendra Kumar, Founder Editor

IT is Budget Time again! But the bubbles of excitement in the air are palpably conspicuous by their absence. And one prominent reason is perhaps the transformative shift of sovereign powers from the bowl of Union List to a common bucket over which only the GST Council can exercise its reign. The two prominent indirect taxes which have moved out of the 'Central Court' are the Central Excise over almost 99% commodities and the Service Tax. So, a large part of the economy believes that a major part of the Union Budget excitement is gone as the Central Government cannot fiddle with the GST rates. And it is so true!

But, the industry and the trade need to remember that the Finance Bill 2018 is going to be the vehicle which most amendments to the GST laws such as CGST Act, UTGST Act and the IGST Act are going to ride for successful 'sail through' in the Parliament. As per the latest inputs, as many as 50 amendments are likely to be proposed to straighten the kinks identified by the expert panels on the GST laws. I believe most political pundits who understand the dynamics and the number calculus of the working of the Parliament are likely to suggest so for smooth and unaltered amendments in the GST laws.

However, I would like to whisper a word of caution for the Union Finance Minister and the GST Council so that another round of haste could be avoided. Amending the law is a serious venture, and it should be attempted with maximum circumspection and a clear-cut long-term implications of the changes. Impact of each amendment on the economy should be assessed quantitavely and then, it should be earmarked for final sail-through. And, for this exercise, I believe that bringing a separate Taxation Amendment Bill would be a more mature political demeanour. Ideally, no shell of secrecy should be attached to the proposed amendment and the same should be made public. A short window of 10 days must be given to the industry and trade for prudent inputs. It is required more so because after these amendments the next opportunity to do so would come only after a year when the Nation would be going to the hustings.

Let me now switch to the direct tax turf. It is true that it is going to be the last Budget to be presented by the Union Finance Minister, Mr Arun Jaitley, before his Government seeks fresh mandate for another five years tenure in early 2019. Going by the precedents in the past when the Finance Ministers used to loosen the strings of the treasury purse by keeping their third eye on voters, one may expect a similar behaviroural response from Mr Jaitley. But, going by the oft-repeated doctrine of fiscal consolidation which has been the guiding lamp for the Modi Govt so far, it is highly unlikely that Mr Jaitley would allow history to repeat itself against the precarious revenue statistics. The GST continues to be in its infancy. It requires careful and thoughtful nursing before it starts producing the much-talked about enrichment of the revenue kitty. The latest GST Collections may have caused a few scares in the revenue corridors but the slump in the figures is along the expected lines because of three major factors - 1) slashing of the tax rates on 178 items by mid-Nov; 2) greater utilisation of the IGST Credit; and 3) the growing graph of non-compliance by small traders coupled with the GSTN problems. The fact of the matter is that the GST continues to be a 'baby tax' and fiscal juggernauts in North Block should not expect it to meet its annual targets so early in its journey.

In this backdrop, there is going to be a shortfall of at least Rs 90,000 Crore on the GST front. So far as the Customs goes, its revenue-earning potential has rapidly shrunk to the Basic Customs Duty (BCD) in view of various FTAs and other trade pacts India has signed with many trading partners. On the direct tax front, not only the demonetisation but also the slowdown in the global economy adversely impacting our exports, have not yet allowed the 'yawning space' for profits to the industry. Though the economy is limping back to above 7% growth turf but the rising cost has eaten into the profit dimension of the economy. As per the latest revenue figures, the CBDT has managed only about 43% of the Budget Estimates. Fearing huge deficit on the indirect taxes front, the Govt has further increased the direct tax targets from Rs 9.8 lakh crore to Rs 10 lakh crore. Going by the precarious revenue position I do not think that Mr Jaitley would attempt too many experiments with the tax slabs and the tax rates.

If one visits Para 139 of his Budget Speech of 2017, he had noted that "India’s tax to GDP ratio is very low, and the proportion of direct tax to indirect tax is not optimal from the view point of social justice. I place before you certain data to indicate that our direct tax collection is not commensurate with the income and consumption pattern of Indian economy ..." The fact that the tax base for direct taxes has significantly grown to over SIX Crore, thanks to many out-of-box legislative-cum-policy measures, may not convince the revenue planners to grant much relief. As compared to 2014-15 when only about 1.9 Crore taxpayers had paid taxes, the number grew to a little over two crore in 2015-16. This clearly indicates that though the tax base expanded but the growth was more below the exemption threshold of Rs 2.5 lakh. The total tax paid by individual return-filers in 2015-16 is found to be less than what it was in 2014-15. In this backdrop, Mr Jaitley is unlikely to feel much motivated to tinker with the tax rates this time. Nonetheless in such a tight position I would prefer Mr Jaitley at least bringing some of the allowances to near-realistic marks. And some of these could be the education, hostel, transport, gratuity and many other allowances which have been left to look ludicrous against the rising cost graphs in the economy.

On the corporate tax front, it is true that Mr Jaitely had stated his vision to reduce the corporate tax rate to 25% from the present 30% along side the grandfathering of multiple exemptions. Some of the exemptions availed by larger corporates have been notified with a sunset clause and many more can be expected to be announced in this Budget but I am not too optimistic about the corporate tax rate. One reason is that even one per cent cut in the tax rate means an erosion of about over Rs 35000 - Rs 40,000 Crore. In fact, one may recall what Mr Jaitley had stated in 2017 on the issue of lowering of MAT rate - "Although the plan for phasing out of exemptions will kick in from 1.4.2017, the full benefit of revenue out of phase-out will be available to Government only after 7 to 10 years when all those who are already availing exemptions at present complete their period of availment. Therefore, it is not practical to remove or reduce MAT at present ..."

In this backdrop, my only expectation is that either Mr Jaitley puts on the hat of Mr Trump and slashes the corporate tax rate from 30% to 24% to bring India at par with many of its peer group tax jurisdictions or at least remove multiple surcharges along with lowering of the MAT rate to 15% from 18.5%. Since some of the exemptions would be phased out, it would be a good pill to leave more than expected money in the hands of the private sector which could put less pressure on the financial institutions marred by the rising graph of NPAs and kick-start private investments. The decline in capital formation rate is a major area of worries for our economists and it may be addressed in such a fashion. Since such a slash in rates would be prior to the State elections, it may also earn political goodwill besides reviving the economy just prior to the general elections. Since the future vision is to reduce corporate tax rate, it makes all sense to start with the reduction in the MAT rate.

Since protecting environment has become the avowed policy commitment of the Modi Government, Mr Jaitley may like to revisit Section 80IA benefits at least for undertakings engaged in solar and other renewable energy sources for a couple of years. Since solar energy sector has not got a fair treatment in the GST regime, it is time now to put a band-aid on their bruises. Similarly, Section 80IA(12A) needs a revisit as it must be remembered that merger and demerger are natural survival instincts of business entities in highly competitive industry. If they do not undertake such timely exercises, they would die an untimely death. Therefore, if one tries hard to survive and swim across the troubled waters, putting restriction on Sec 80IA(12A) benefit is not a mature response from the Government.

Before I wrap up today's column I would like to suggest that Mr Jaitley pays attention to the recent Delhi High Court decision on the ICDS which fails to add any value to the revenue's cause. Many of the standards prescribed by the ICDS notification have been read down and the CBDT should not make the accounting waters more muddy. The Industry is already trying hard to cope up with the provisions of new Companies Act; ICAI new guidelines and IFRS. Asking the industry to maintain one more set of records is a futile exercise and Mr Jaitley should have a tete-a-tete with the CBDT topbrass to guillotine such standards.