Budget 2019 brings tax relief but reforms agenda left behind

On July 5, Finance Minister Nirmala Sitharaman presented the first ever budget for the second term of the current government and set an ambitious target of making India a $5 trillion economy by 2024. While outlining the work done by her government, the FM praised businesses and said that they are the backbone of the economy. 
 
In order to further boost tax compliance and provide a relief to the industry, she announced that companies with a turnover of up to Rs 400 crore will now be taxed at only 25% as opposed to 30% earlier for any company with more than Rs 250 crore of turnover. 
 
“I  aim to  simplify tax  administration and  bring greater transparency.  110. So far as corporate tax is concerned, we continue with phased reduction in rates. Currently, the lower rate of 25 % is only applicable to companies having annual turnover up to  Rs 250 Crore. I propose to widen this to include all companies having annual turnover up to Rs 400 crore,” she said during the budget presentation. 
 
This, the FM claimed, will cover 99.3% of all enterprises in the country and a tiny minority of just 0.7% of companies will remain at a higher tax rate slab. 
 
The government earned a revenue of Rs 5.71 lakh crore during the year 2017-18 from corporation tax while the revised estimates for FY2019 were pegged at Rs 6.71 lakh crore. This year, the target is even more ambitious with a budgetary estimate of Rs 7.66 lakh crore. 
 
Economists expect the lower corporate tax rate could aid in spurring investment in the economy as companies and investors are expected to plough back their additional funds in businesses and job creation. However, the evidence on this is patchy. 
 
A study by the Kellog School of Management found that lower corporate tax can spur economic growth only if the current tax rate is very high. India, for instance, has had a 25-30% tax rate which is close to the median tax rate seen across major economies in the world. 
 
Moreover, the study pointed out that since most companies figure out how to pay lower taxes than their official rate of taxation, the positive effects on the economy could be less than dramatic. 
 
Only 19 lakh firms and businesses filed tax returns in the financial year ending 2018, according to the Income Tax Department data. 
 
Incremental, not reformist
 
While the budget provisions laid down by the finance minister are expected to further help ease of doing business and deepen financial markets, the budget stayed away from introducing any big-bang reforms. 
 
For instance, the budget provisions for lesser scrutiny by the income tax department for startups, allows easier access to the markets to foreign portfolio investors through easier KYC norms and focuses on deepening bond markets through credit default swaps.
 
However, this doesn’t seem to cut it. The larger business community was expecting big-bang reforms such as easing of FDI limits in key sectors, introducing multi-brand retail, easier local sourcing norms and most of all, a reformed labour law. 
 
The finance minister did mention that labour reforms are necessary and the existing laws will be bundled and streamlined into four major categories of labour guidelines in the coming days but the budget document doesn’t expand on the general direction of these reforms or their expected outcomes. 
 
Similarly, the introduction of additional surcharges for people above the income of Rs 2 crore a year is likely to hurt high-net worth individuals. Similarly, the introduction of 2% TDS on cash withdrawals above Rs 2 crore a year will trouble businesses large cash transactions is critical to operations. 
 
Even as the FM works with new Chief Economic Advisor, a new RBI governor and revamped institutions to make India a $5 trillion economy, the industry hopes that their ambition should not stay limited to just the budget document. A lot more needs to be done. 
 
“Definitely, this is at best an incrementalist budget. Some might even say it is just a supplementary budget to the interim budget already introduce! No really bold steps, no really visionary things,” said Economist Swaminathan Aiyar. 


Add new comment