There was a day and age when Budget lectures were common and people thronged to hear them. I don’t mean only Nani Palkhivala’s Budget lectures. There were others too. We thronged to hear them because (a) taxes changed every year; (b) provisions weren’t transparent; and (c) chartered accountants and lawyers were needed to interpret the Finance Bill. Times have changed and this isn’t only because analysts dissect Budgets threadbare on television and social media. Budgets have become simpler and more transparent. Taxes are headed towards stability, though that’s still a work in progress.
As citizens, we sometimes retain the mindset of Narayan Dutt Tiwari’s “sindoor” Budget of 1988-89. In reacting to the Union Budget, we ask: How have taxes changed? Taxes can mean domestic indirect taxes, customs duties or direct taxes. Domestic indirect taxes are the purview of the GST Council. The GST hasn’t yet reached its terminal goal, with a three-tier structure, and not all items are part of it. The FM could have tinkered with products not yet part of the GST. However, she has rightly refrained and the speech states, “As Chairperson of the Council, I want to assure the House that we shall take every possible measure to smoothen the GST further, and remove anomalies such as the inverted duty structure.” For both direct and indirect taxes, the objective is removal of exemptions. Indeed, for direct taxes, there is the option of choosing a no-exemption channel.
The customs duty structure is still somewhat messy, compounded by RTAs (regional trade agreements). Revamping RTAs is something that will occur outside the Budget. In the Budget, “Last year, we started overhauling the Customs Duty structure, eliminating 80 outdated exemptions. ... I now propose to review more than 400 old exemptions this year. We will conduct this through extensive consultations, and from 1 October 2021, we will put in place a revised customs duty structure, free of distortions.” For all taxes, exemptions increase compliance costs and enrich CAs and lawyers.
Therefore, we should be happy: (a) there are few changes in direct taxes and customs duties (apart from some rationalisation); (b) no additional tax exemptions have been given across the board; (c) there are no additional cesses (Covid was a convenient trigger) and surcharges; and (d) there have been several procedural improvements in tax administration. For instance, “I therefore propose to reduce this time limit for reopening of assessment to three years from the present six years.” Or, “We shall establish a National Faceless Income Tax Appellate Tribunal Centre.” I have met several people who complain (rightly or wrongly) about harassment and rent-seeking by tax departments. Irrespective of whether the allegation is true or false, we should welcome anonymity and reduction in the human interface.
Other than taxes, we have often looked at Union Budgets with the prism of expenditure and typically applaud Part A of the speech. About two-thirds of public expenditure is actually done by state governments and there are recommendations of the 15th Finance Commission on tax devolution. Some items of expenditure (wages, pensions, interest payments) are also fixed for the FM in the short-turn. The challenge was to increase expenditure on (a) health; (b) physical infrastructure; and (c) capital expenditure, while bearing the above points in mind, without being fiscally profligate. Expenditure reform is still a work in progress, both at Union and state government levels. It hasn’t progressed as far as tax reform has. But to that end, “On the recommendation of the Fifteenth Finance Commission, we have undertaken a detailed exercise to rationalise and bring down the number of Centrally Sponsored Schemes.”
In 2020-21, real GDP is estimated to have declined by 7.7%. With that resultant low base, what kind of real GDP growth is expected for 2021-22? Most independent analysts will say at least 10%, probably closer to 11%. With inflation (measured by the GDP deflator) approaching something like 5%, most people will expect nominal GDP growth of almost 16%. In framing a Budget, the temptation is always to overestimate revenue and underestimate expenditure. Unrealistic tax revenue targets also exert pressure on tax departments and lead to harassment of taxpayers. The Budget actually expects 14.4% nominal growth, on the conservative side.
None of the components of tax revenue or expenditure projections look unrealistic. Some people might cavil at the Rs 1,75,000 crore disinvestment receipts, contrasting it with the dismal performance in 2020-21. That’s an unfair comment, because (a) 2020-21 was an exceptional year; and (b) the Budget contemplates an aggressive plan of privatisation/disinvestment and asset monetisation. “Other than IDBI Bank, we propose to take up the privatisation of two Public Sector Banks and one General Insurance company in the year 2021-22. This would require legislative amendments and I propose to introduce the amendments in this Session itself.” Sure, legislation must be changed. But the intent is aggressive, as is the statement about liberalising FDI in insurance.
When considering the fiscal deficit/GDP ratio of 6.8% in 2021-22, one must also remember the Union government has been far more transparent in its Budget numbers since May 2014. “In the July 2019-2020 Budget, I introduced the Statement 27 on Extra Budgetary Resources—it disclosed the borrowings of government agencies that went towards funding GoI schemes, and whose repayment burden was on the government. In my 2020-2021 Budget, I enhanced the scope and coverage of the Statement, by including the loans provided by the government to the FCI. Taking a step further in this direction, I propose to discontinue the NSSF Loan to FCI for Food Subsidy and accordingly Budget Provisions have been made in RE 2020-21 and BE 2021-22.” Several reforms (power distribution, gold exchanges, portability of welfare measures) are also about choice and efficiency. That’s what non-sindoor Budgets should be about.
Bibek Debroy, Chairman, Economic Advisory Council to the PM. Views are personal