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    Why easing taxpayers' load in Budget 2021 is a good idea


    Story outline

    — Economic growth runs on four engines: consumption, investment, government expenditure and exports.
    — During lockdown, only govt expenditure had the wherewithal to fire.
    — Confidence in back now, so more money should be left in consumers' hands.
    — It could also involve cash transfers to the poorer sections of the population.
    — GoI should look to engineer a stimulus while reducing the taxpayers’ burden at the same time.
    This is not the time for GoI to increase its spending by taking a bigger share from taxpayers.
    British Prime Minister Margaret Thatcher famously said that there is no such thing as public money, only taxpayers’ money. Every Union budget is important not because it presents GoI’s accounts, an otherwise boring exercise, but because it is a statement of how the government is managing our — the taxpayers’ — money.

    Often, it is said that only a very small minority of Indians pays tax. That is only true for income-tax (I-T). Almost everyone pays indirect tax when they spend on consumption. In India, two-thirds of total tax collection comes from the indirect side. Every Indian must, therefore, care about the budget, the upcoming one being particularly important.

    It is the first budget in independent India that follows such a sharp contraction in growth. The last time India registered negative annual growth was in 1979, when the economy was a fraction of the size it is today and the decline not as sharp. In the circumstances, conventional Keynesian economic wisdom would demand a fiscal expansion. But while the economy has recovered well from the shock of the first two quarters, growth will only be marginally positive in the last two quarters. India needs to grow fast, at over 8% in 2021-22, just to return to the place it was before Covid-19 struck.

    Economic growth runs on four engines: consumption, investment, government expenditure and exports.

    Despite the larger-than-life role of government, the share of its spending in the Gross domestic product (GDP) at around 13% makes it the least weighty of the four. (Consumption is by far the largest at over 55% of GDP.) Can the smallest, and arguably least efficient, engine be the prime driver of speedy growth?

    In the first two quarters, when the lockdown was in force in varying degrees, and confidence at rock bottom in the face of an unknown virus, the answer would have been an unambiguous yes. In the circumstances that prevailed at that time, the other three engines of growth were unlikely to fire.

    A physical lockdown depressed private consumption, the global nature of the coronavirus pandemic and cross-border controls squeezed exports, and complete uncertainty took a toll on private investment with firms and people tightening belts for difficult times. Only the Government of India could loosen its belt and spend more to prevent a total collapse.

    In India, the government gave a greater emphasis to liquidity support to struggling firms and individuals than to spending, unlike in many other countries. If GoI did not splurge then, what is the probability it would do so now? The difference is that at that time, government revenues had also dried up, which dissuaded additional spending.

    But they have now recovered since the rebound in the economy. The temptation to do a fiscal stimulus by spending more is higher this time. However, there are two ways to do a fiscal stimulus. Either GoI spends more, or it earns/spends less leaving more money to households and firms to spend/invest. The budget must focus on the latter. This is not the time for GoI to increase its spending by taking a bigger share from taxpayers.

    On the contrary, it should cut taxes on individuals and firms and allow them to play a bigger part in the revival story. Confidence is back. An effective stimulus could address over-the-top taxation, such as cesses, which can be removed. It could also involve cash transfers to the poorer sections of the population, which will spend immediately.

    These will immediately boost investment and consumption, thereby stimulating a supply response creating a virtuous cycle for growth. To the extent that GoI wishes to spend more, on infrastructure, for example, it should avoid additional taxation. Because of India’s legacy of a State-led economy, GoI has its own sources of wealth and revenue — public sector undertakings (PSUs) and land assets. One option it has is to direct PSUs to undertake investment expenditure.

    But given the fragile state of finances of most PSUs and the inefficiencies in their operations (like government, they too are bound by lengthy processes), the superior option is to divest PSUs. The demand for assets driven by plentiful cheap liquidity, as evidenced by the booming stock markets, is very high. This applies to assets other than PSUs as well, like airports, ports and highways, as well as tracts of unused land owned by the Indian Railways, defence services and other agencies. Revenue from the monetisation of these assets may be used to finance additional government investment expenditure, without burdening taxpayers.

    The finance minister has promised the best budget in 100 years. If GoI can engineer a stimulus while reducing the taxpayers’ burden, indeed it will be.

    The author is chief economist, Vedanta

    ( Originally published on Jan 18, 2021 )
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
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    28 Comments on this Story

    Prabhakar Sunku43 days ago
    Tax filing is getting complicated with changes every year.Please make it simple so that we need not go to CA.All senior citizens should be allowed to file ITR1 irrespective of their income whether two houses or LTCG due to MF ,which is a very bad idea.
    Sujata Mathur44 days ago
    At least ensure that people earning upto five lakhs don't have to file returns, since no tax is due. Also exempt senior citizens from filing returns, if after exemptions, no tax is due. These simple steps will make life a little easier for senior citizens, and those with incomes below five lakhs. It is also a good idea to re look at tax slabs and higher interest rates for senior citizens keeping in mind inflation, and the impact of Covid.
    Nishikant Mohanty44 days ago
    In the near term, there is need to bring back spending. This will bring back the economic growth, and indirectly generate revenue for the government by way of taxes from corporate profits. This in turn, will help in infrastructure spends. Hence I would say, reduce taxes, provide exemption till 10 Lacs income. Broadening of the tax net will help bring more taxes. The segment that is unorganized but makes cash business (e.g. a sweets shop, a snacks shop, a trader in household goods, etc) can make a self-declared income and pay a fixed annual tax, based on a slab of income, call it nation-building tax. Likewise, for HNIs and UHNIs, the declaration of income should be more exhaustive, audited by a certified Chartered Accountant, to minimize leakage. The govt to roll out a Social Security Scheme (with a monthly income, similar to an old age pension) for all tax payers. This will be an incentive for more people to be tax compliant.
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