Budget 2024 shouldn’t be evaluated on tax cuts. Avoiding policy flaws is more important

Budget 2024 shouldn’t be evaluated on tax cuts. Avoiding policy flaws is more important

In its pre-Budget meetings with finance ministry mandarins, India Inc is reported to have asked for relief in direct tax rates for those with a taxable income of up to ₹ 20 lakh, a reduction in excise duty on petrol and diesel, an increase in minimum wages to be paid under Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and an increase in the amount paid to farmers under Pradhan Mantri Kisan Samman Nidhi or PM KISAN. One of the industry bodies has also asked for rationalising the goods and services tax (GST) into a three-rate system and simplifying the complex structure of capital gains taxation for all financial assets.

What are the prospects of the government accepting some of these recommendations and announcing them in the Budget in July? Going beyond these recommendations, it would also be instructive to assess the key issues that should engage the attention of the makers of the Modi government’s first Budget in its third term.

The demand for converting multiple GST rates into just three, thereby raising the revenue-neutral rate and improving tax collections, has merit. But the Union Budget is not where such announcements can be expected. A committee consisting of representatives from the Centre and states is examining this issue and a decision should ideally arise out of deliberations of the GST Council, based on the recommendations made by this committee. Will Finance Minister Nirmala Sitharaman reveal the Centre’s stance on the question of reducing the number of GST rates in the Budget? Quite unlikely.

The demand for simplifying a complex capital gains tax structure for both financial and non-financial assets like real estate is also justified. Of particular interest will be the industry body’s recommendation that the holding period after which financial assets attract long term capital gains tax should be made uniform at over 12 months and the rate rationalised at 10 per cent.

Similarly, short-term capital gains tax rate should be 15 per cent for financial assets. The suggestion to make the capital gains structure simple and transparent is valid. The original idea of reforming it was mooted about a few years ago. Surely, it is time for the government to take a final decision.

But will the government make the new structure public through the Budget? Over the last many years, Union Budget speeches have been disinclined to make any announcements that may potentially upset the stock market. The apprehension is that any move that might be unpopular for any segment of the stock market should not be allowed to neutralise the overall positive impact of the Budget or its tax relief proposals.

Thus, the Budget’s temptation could be to include only those moves which positively impact the stock market and steer clear of a step like restructuring the capital gains taxation regime, which will please some but could upset many more. The 2024-25 Budget, therefore, could reiterate the necessity of simplifying the capital gains taxation for assets of different types, but entrust the task of implementing the actual steps with an empowered committee later during the year.

The idea of increasing wages under MGNREGS and the amount paid to farmers under PM KISAN should prove to be attractive for the Modi government in the current political environment. Given the recent results of post-poll surveys showing rural India’s preference for the ruling party on the wane, the Budget for 2024-25 will be seriously inclined to raise both MGNREGS wages and the PM KISAN amount.

The wages should reflect the actual rural inflation index in recent years, just as the PM KISAN amount of ₹ 6,000 to a farming household during a year, announced in 2019, should be raised appropriately to reflect at least the impact of inflation. This should not cause a big concern to the government’s fiscal consolidation drive as the tax-revenue buoyancy and the surplus transfer it has received from the Reserve Bank of India should be adequate to meet such increased costs.

The big debate will be on whether the suggested income-tax relief for a large number of middle-class Indians will be accepted by the government. For 202122, an estimated 68 million individuals filed their income-tax returns. Of them, however, over 58 million reported a gross total annual income of between ₹ 2.5 lakh and ₹ 20 lakh. The number of individuals in this income range would have increased significantly since then. Any tax relief for this category of taxpayers would benefit a huge number of Indians. But if the Budget offers such a relief, it would also mean a revenue loss. India Inc’s argument is that the tax relief, in addition to increased wages under MGNREGS and higher amount for PM KISAN, would help boost consumption demand.

But the Modi government has so far relied less on such tax relief to boost demand and has preferred to increase investment to revive the economy. A tax relief before the elections could have had some political logic. Now that elections are over and the Modi government’s promise on direct-tax restructuring is to be fulfilled in any case, it would make sense to complete the direct tax reforms that were started a couple of years ago. Evaluating the Budget on whether it cuts tax rates for the Indian middle class would be a wrong yardstick. Reducing tax on petrol and diesel could be risky for the same reasons and in view of the uncertain environment in the international crude oil market.

Instead of evaluating the Budget on the basis of fulfilling such demands, the forthcoming Budget should perhaps be judged by whether it manages to avoid at least four policy flaws or pitfalls. One, it should not deviate from the path of fiscal consolidation that the Budgets of post-Covid years have outlined. Indeed, it would make sense if the goalposts are advanced by a year. Two, the Budget should reverse the process of raising import tariffs that began a few years ago. If the export growth of India, whose import intensity is not insignificant, has to be placed on the fast track, the process of reducing import tariffs must begin once again. Three, the government should not slow the pace of its investment in creating infrastructure.

In the last few years, the government’s capital expenditure has helped grow the Indian economy and there are no clear signs as yet if the private sector’s investments have revived. And finally, the rush to expand the list of sectors to be covered under the production linked incentive (PLI) scheme should be contained. The PLI scheme has many costs that are incurred not just by the central exchequer but also by the manufacturing sector, whose dependence on subsidies rises without worrying too much about the need to improve its competitiveness.

The Budget for 2024-2025 may not fulfill the entire wish list of India Inc on direct-tax relief, a cut in duty on petrol and diesel, capital gains tax restructuring and higher allocation for schemes for MGNREGS and PM KISAN. But it is reasonable to argue that the Indian industry will benefit more if the Budget avoids the four pitfalls cited above.

AK Bhattacharya is the Editorial Director, Business Standard. He tweets @AshokAkaybee. Views are personal.