Millennium Post

What can Jaitley do?

It is difficult to blend populism with tough measures

What can  Jaitley  do?
Come January, all sorts of rent-seeking and lobbies start, demanding tax sops and other concessions in the General Budget. But the voice of underprivileged and poor, particularly farmers, who have been hit by an unprecedented crisis, is hardly heard as it is very feeble.
It has always been a balancing act for any Finance Minister in India and for Arun Jaitley, it is no different, as he too will have to resort to tight-rope-walk in balancing growth and fiscal prudence. It is going to be all the more pressing this time as this being the last full budget for the Narendra Modi government before it goes to polls in April-May next year.
Jaitley is in no envious position as he will have to blend populism with tough measures to put the economy back on rails, which has slowed down, partly because of demonetisation and the rollout of game-changing indirect tax reforms – Goods and Services Tax. Budget making is, therefore, not going to be easy.
One area that Jaitley should look at this time is the corporate tax structure. This is one area that could give him much-needed additional revenue for increased public expenditure without any major tinkering with corporate tax rates. This will also help him to ensure that fiscal consolidation process is continued without a major breach on fiscal deficit targets.
The corporates in India seem to want only tax sops. They seldom come out with suggestions for generating revenue for public expenditure on various social schemes and other developmental activities. In fact, the government is losing about Rs 6 lakh crore every year because of tax sops provided to industry and charitable trusts. The money lost every year on this count is almost equivalent to fiscal deficit of the central government. In one go, the entire fiscal deficit can be wiped out by withdrawing these exemptions to corporate, besides ending crony capitalism. But the question is: will Jaitley take the bull by the horn?
Well, the Modi government can do it as it has taken some tough economic decisions in the last three years. It is time that government came out with the road map for direct tax code as well so that tax exemptions are phased out. The corporates get tax sops year after year with a view to enabling them save for capital expenditure. But unfortunately, private investment is not forthcoming in the last few years due to excess capacity.
As it is, the private sector is sitting on a huge pile of cash, running into several lakhs of crores of rupees. So, why should they get more tax sops, that too when they are not investing. Such a scenario, therefore, is an opportune moment for the government to withdraw all tax exemptions to corporate so that it gets additional money from corporates, for public expenditure needs to be boosted to pump-prime the economy by stepping up expenditure in infrastructure like roads, railways, irrigation, water management etc. This will also help in job creation.
When public sector companies do not invest their huge pile of cash, government seeks additional dividend so that the money comes into its kitty. Likewise, when private investment is not forthcoming, the government should withdraw the tax exemptions so that more money is secured for public expenditure.
In the face of farm and rural distress, the government will have to step up public expenditure on agriculture, rural infrastructure and rural industries, which means increased fiscal deficit. To ensure that the fiscal slippages do not go out of control, the government should mop up additional revenue by withdrawing the huge tax exemptions to corporates.
Though corporates claim to pay 30 per cent tax, the real corporate tax rate is around 21 per cent only because of tax exemptions, some of which are selective and not good for healthy competition in the industry. This also does not provide level playing field to new industries, thereby discouraging new entrepreneurship. Thirty per cent corporate tax is one of the lowest in the world and yet corporates in India crib and do not want to contribute even this amount for nation-building. Finance Minister Arun Jaitley has already drawn up a roadmap to reduce it to 25 per cent and this should not be done without removing all tax exemptions to the corporate sector. Also one fails to understand the logic in corporates paying 25 per cent when personal income tax rate is 30 per cent. It is time there was equity in tax structure.
Just as the government has brought about GST, which, of course, needs to be improved upon in due course of time by bringing in real estate and petroleum into its net, it was time for direct tax reforms as well. GST too ultimately has to move towards two rate structure for merit and demerit goods so that it becomes simple to comply with and easy to administer. Also the country should move towards a tax system where there are no tax exemptions. If some industry or a sector is to be incentivised, it should be by way of subsidy and not by tax sop, which distorts the entire tax system in the country.
If corporate tax is lowered to 25 per cent after phasing out all tax exemptions, then personal income tax too should have lower rates of 10,15 and 20 per cent, with all income, including farm income, being brought under tax net beyond a threshold so that poor, including farmers, are exempted. This sort of tax structure will bring about equity, besides stability, improved compliance and increased tax revenue. Also, this will ensure there is more money in the pockets of everyone, including middle class to spur growth through increased demand.
This sort of tax structure is doable and will ensure that budget-making becomes easier as there will be no rent-seeking. This will also help the government to deal with corruption and black money generation. Compliance too will improve and litigation will be minimised. Tax laws will be devoid of loopholes and interpretation so that tax avoidance and evasion get eliminated and the tax system will become cleaner, less complicated, simple to administer, improve compliance for the benefit of the government, people and the economy. IPA
(The views expressed are strictly personal)
KR Sudhaman

KR Sudhaman

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