Union Budgets Are Not For Tax Tinkering
Finance Minister Arun Jaitley will tinker with taxes: an increase of Rs 25,000 in exemptions here, a 5 per cent cut in excise duty there, a tweak in personal income-tax slabs everywhere
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No country in the world has converted a straightforward annual statement of government accounts into televised theatre as India does every February.
In the United States, the annual budget passes without a ripple. It is discussed threadbare in the Senate and House Committees but it is not an annual make-or-break fiscal event. Britain, from whom India picked up this bad habit, does attach some importance to the Chancellor of the Exchequer's annual March budget. But even in Britain the focus is increasingly on year-round economic reforms rather than an annual fiscal smorgasbord.
On February 29, Finance Minister Arun Jaitley will deliver the 2016-17 Union Budget. In the grand tradition of Indian finance ministers, he will tinker with taxes: an increase of Rs 25,000 in exemptions here, a 5 per cent cut in excise duty there, a tweak in personal income-tax slabs everywhere.
And then will follow an hour of small changes in customs and excise duties across a laundry list of items: jewellery, tobacco, automotive, machine tools, consumer goods and so endlessly on.
An annual Budget should focus on one big idea. What should the 2016-17 Union Budget focus on?
The "Start-up India" initiative by Prime Minister Narendra Modi has shown that even the limpid, obscurantist bureaucracy, when motivated, can create conditions where businesses can flourish. As Modi said at the event on January 16: "Tell us what not to do."
There are six strands, all of which when strung together, can form a new economic paradigm.
First: sweeping tax reform. Simplify personal income-tax, reduce exemptions, cut corporate tax and look at the big picture. As I wrote here recently, 99 per cent of India's 3.70 crore taxpayers pay a mere Rs. 1 lakh crore in personal income-tax. Just 1 per cent pay Rs. 2 lakh crore in tax.
It makes little sense to tinker with tax slabs and tax rates of 99% of India's tax-payers: any positive outcome will be dwarfed by the enormous manpower deployed to monitor 3.66 crore tax-payers who pay an average of Rs. 28,000 each annually in tax (Rs. 28,000 x 3.70 crore tax-payers = approx Rs. 1 lakh crore). Much of this tax is anyway paid automatically as TDS. What does make sense is to rationalise the tax regime with a flat tax as I wrote here.
Second: repeal the regressive retrospective tax. This needs passing a simple amendment to the IT Act in parliament.
Third: cut red tape. Just as the prime minister's Start-up India initiative promises starting a business in one working day, make all businesses easy to start - and easy to shut down. Investors will flock to India.
Fourth: clean up bank NPAs (as bankrupt power discom debts have been) so they can start lending again to corporates.
Fifth: ramp up public investment by using savings from the crude oil price plunge. At below $27 a barrel, India's oil import bill in 2016 could fall to as low as $35-40 billion compared to $150 billion when crude was $115 a barrel in May 2014. Use this windfall to boost public spending, especially in infrastructure, education and healthcare.
Sixth: Privatise PSUs. The government must get out of business and spend its time and energy on governance. Leave business alone. IT software flourished because it was left alone.
Alas, on Budget day next month, we may get none of these changes - just more tax tinkering and fiscal fudging.
For a progressive, modern, "start-up" nation, that will no longer do.