FM may Budget for Tax Goodies to Push Growth

Individuals may see take-home rise while lower corporate tax rate could cheer cos

The upcoming budget may bring cheer to both individuals and corporate taxpayers as the government looks to lift sentiment in the wake of demonetisation.
The measures will be aimed at reviving demand and stimulating private investment to boost overall growth

On the cards is a revamp of the income-tax framework for individuals to increase their takehome pay, thus persuading them to start buying more goods and services, and a reduction in the corporate tax rate to encourage companies to invest.

“There are multiple proposals on the table,“ said a government official. “The government is keen on enhancing the purchasing power of people to boost demand.“

The Central Statistics Office (CSO) has estimated that the economy will grow 7.1% in the current financial year, slower than 7.6% last year, but this forecast didn't include the impact of demonetisation.

Private estimates suggest the economy could do worse and may need a stimulus.

“Some fiscal stimulus measures to embed a feel-good factor and stimulate consumption and investment could be taken up,“ said Sudhir Kapadia, national tax leader, EY. “An expected increase in the tax base due to the surge of bank deposits post demonetisation as also GST (goods and services tax) introduction may give leeway to the government in this regard.“ There is a view in the government that the move to boost sentiment should be balanced against the need to ensure that people don't drop out of the tax net, so exemption limits may not be raised too sharply.

The emphasis is therefore likely to be in favour of widening tax brackets and enhancing deductions such as those on housing loans, something that would also perk up the flagging real estate sector.

Another government official said there's an argument for widening slabs or cutting rates for the lowest bracket, which could enhance compliance by encouraging people to pay tax.

The lowest slab of 10% is on annual income of Rs 2.5 lakh to Rs 5 lakh and 20% from Rs 5 lakh to Rs 10 lakh.Above Rs 10 lakh, tax is levied at 30%.

Policymakers contend that while the government intensifies efforts to bring more people within the tax net, it needs to reward those who have been paying taxes diligently .

Only 3.91 crore people filed tax returns in FY15, out of which 1.83 crore paid an average tax of Rs 26,000.

So the Rs 2.5-5 lakh slab could be widened and may be even taxed at a lower rate. The reintroduction of standard deduction, which had been abolished by former finance minister P Chidambaram in the FY06 budget, is also under consideration.

CORPORATE TAX

On the corporate tax side, the government has already spelled out the road map to bring down the rate to 25% over four years beginning this year, while phasing out exemptions.

The latter having begun in the last budget, the pace of reduction could be advanced this time round to boost investment sentiment.

Many in the government would prefer to advance timing of the cuts rather than leaving it till the end of the government's term. They believe frontloading the cuts could bolster investment.

Gross fixed capital formation, a measure of investment, is forecast to contract 0.2% this year.

A cleanup of the corporate tax structure by removing dividend distribution tax on dividends in the hands of individuals to boost equities and lower the overall tax burden of companies is also being discussed.

Such “measures would be in line with the government's long-term objectives“, said the second official cited above.

The budget may also include incentives for businesses to go digital, in line with the government's plan to move to a cash-less economy.

The Economic Times New Delhi,16th January 2017

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