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Budget 2020: Little room to cut income tax rates

By Rahul Renavikar

Union Budget 2020 India: Budget 2020 is scheduled to be unveiled soon, and it is going to be a tightrope walk for finance minister Nirmala Sitharaman. On the one hand, containing the fiscal deficit is a big challenge given the shortfall in tax revenues; on the other hand, the economy's growth rate is slowing down, exports falling short of the target month after month. It is heartening to note that 2020 is the year in which India will witness the highest "demographic dividend", and every constituent of the economy is expecting something or the other from this Budget.

Speaking of tax revenues, the direct, as well as the indirect tax collections, have been much below the stipulated annual targets. In fact, the direct tax collections are expected to fall way short of the annual target-this would be a first in two decades. Further, given the shortfall in the GST collections, there has been an upward revision of the GST collection targets for the last quarter of this fiscal. Whether this will be achieved or not, only time will tell. Further rationalisation of the GST rate structure is in limbo.

In the last (38th ) GST Council meeting, history was made-it was the first time that the GST Council went ahead and voted on the proposal of levying 28% GST on all types of lotteries. While 21 states voted in favour of the proposal, 7 voted against it. It is not that important to know which states voted for and which against, but it is important to note that the first cracks have appeared in the federal co-operatism between the Centre and the states.

Till this meeting, all the decisions taken by the GST Council were unanimous, and without the need for voting. Concern for the falling GST revenues is clearly playing on the minds of the members of the GST Council. Delay by the Centre in settling states' GST compensation claims is only worsening their already-strained financial relations.

In hindsight, assuming a flat 14% growth in the annual revenue for each of the states, without any reference to the growth in the GDP in the corresponding period (five years), is proving to be stressful for the Centre. An amicable solution acceptable to both the Centre and the states should be worked out before it is too late.

The Make in India initiative, after its initial run, has not been picking up enough steam. It can be made more attractive by reducing the customs duty on import of those raw materials which do not have an indigenous source and are used only in manufacturing of goods in India. This will encourage Indian manufacturing, and make these products globally competitive. It will also enhance economic activity in the country, boosting employment, and, hence, consumption.

Exporters are facing a slowdown in their sales as well, and a comprehensive incentive scheme is expected to boost exports. The new Foreign Trade Policy (FTP) is expected to be unveiled in the near future given that the validity of the current FTP ends on March 31, 2020. A complete overhaul of the export incentive scheme is expected to make it WTO-compliant, and in sync with other central and state incentives.

The yield after introduction of a new corporate tax rate of 15% for newly formed manufacturing companies is yet to be seen. The rates for personal income tax are also expected to be rationalised, with an aim to increase the disposable income in the hands of individuals.

However, FM has limited options as far as the tinkering of the tax rates is concerned. Any further reduction in the tax rates would lead to an enhanced fiscal deficit. Hence, non-tax revenue, such as disinvestment, is likely to take centrestage once again to shore up the shortfall in the tax collections. The economic mood is not upbeat currently, and how much more revenue is expected to be collected remains to be seen.

Given this backdrop, Budget 2020 appears to be a classic case of being between the devil and the deep sea. The announcements to be made in the budget are certainly eagerly awaited as the circumstances in which they would be introduced are extraordinary. While trade and industry would welcome the steps taken for boosting consumption-and, hence, the economy-the common man would be more than happy if the tax burden is reduced. Fingers crossed!

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