Finance minister Nirmala Sitharaman will present her third Budget next week. It will be announced in the backdrop of unarguably the most challenging economic environment India has faced in three decades. The tax structure is lopsided as the government has piled on fuel taxes to offset revenue shortfalls. To compound problems, the economic recession has coincided with an immediate national threat in the form of China’s PLA, catalysing emergency defence acquisitions.
On direct taxation, we are in the early stages of big changes initiated in late 2019 to align India’s corporate tax rate to East Asian levels. These must continue, and there’s a case to enhance standard deduction to provide taxpayers some relief in a harsh environment. This won’t cost the government much in the larger scheme of things, but will ease the burden on individuals.
Another change needed is to use fiscal incentives to boost India’s pool of long-term savings that are essential to build infrastructure, the prerequisite for a competitive economy. Infrastructure bonds with long lock-in periods need tax incentives. Similarly, pension funds need a boost by providing a tax break on annuities, the regular payments received after retirement. Carefully designed tax breaks can significantly increase the pool of domestic long-term savings, which will also minimise the financial sector risks that exist today because of a mismatch in the duration of deposits and their subsequent investment. On the other hand, a tax change that’s avoidable is further increase in import tariffs. The government’s keen on tapping global value chains. A high tariff wall won’t allow Indian companies to tap these opportunities. It will also limit foreign investment in manufacturing as high tariffs restrict export opportunities.
Finally, on expenditure the government doesn’t have a serious problem. Following the pandemic, spending hasn’t gone out of control. It’s revenue that shrank because of the lockdown. Therefore, in the forthcoming year the government needs to spend more in selected areas to quicken economic growth. If it can cut back on unproductive subsidies to make room for such expenditure, all the better. It’s growth which provides the resources to solve many existing problems and creates opportunities for the millions entering the job market. More growth will organically generate more revenues for the government – which must, above all, resist the temptation of piling on more taxes on the hapless Indian taxpayer in the name of whatsoever worthy cause, thereby further reducing the scope for savings, investment and enterprise.
This piece appeared as an editorial opinion in the print edition of The Times of India.
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