The year that has gone by indeed ended on a chaotic and a confusing note with much hopes and aspirations from the BJP Government being spilled over to the next financial year.
Demonetisation in India and US Presidential elections have been the key highlights of the year 2016 and perhaps the highlights that have invited mixed reactions. Everyone is now eyeing the upcoming Union budget on February 1, 2017, especially when it has been recorded that rendering high denomination currency of INR 500 and INR 1,000 illegal on November 8, 2016, has adversely and very starkly hit business in the last quarter of 2016 with little respite expected in the first quarter of 2017.
This early budget has been conjectured to be a move to ensure timely implementation of the announcements, thus made unlike earlier when there used to be barely a month between the presentation of the Union budget and the next financial year. However, there is a smarter flip side to this earlier announcement of the budget as it leaves with an evaluator very less time to assess the impact of demonetization per se.
Now, if Modi’s Bhartiya Janta Party believes that demonetization has been a successful move against black money, then it is virtually imperative that personal tax cuts be announced in the present budget, unlike the last union budget where it stood unchanged. Further, higher tax exemption slab is needed from the current budget session to curb tax evasion and let people take the aim behind demonetisation seriously. If the government feels that it has successfully penalised the defaulters, then this budget is the time to reward the honest payers! The expectations towards lower direct taxes such as Income tax has further gained momentum due to announcements made in the end December by the Finance Minister, Arun Jaitley, on the need to have lower tax rates, like the one prevailing in many other developing economies. Lower tax rates, in general, entails the potential to fetch greater revenues by having a broader tax base, making the commodities cheaper, hence, more competitive in the global market thereby accelerating the revenues for the economy.
Strive towards a Digital India
Given the present government’s efforts towards a digitalized economy, the government is likely to announce special rebates/discounts on payments made by debit/credit cards. This has been published, in piece-meal fashion recently, as for those making payments through digital mediums like mobile wallets, debit/credit cards, etc. service tax (on payments for transactions up to INR 2000 through debit/credit cards) have been removed and 0.75% discount has been announced for digital payments at petrol stations. In the drive towards Digital India, the recent budget can entail announcements on taxes being placed on cash withdrawals beyond a threshold.
Further, the government can reduce the incentive to hold cash by raising the tax breaks offered on money held in fixed deposits and mutual funds under Section 80C scheme.
There is saying “There are only two certainties in life – death and taxes” and if historical records are anything to go by, you do not need a crystal ball to predict that the taxes of alcohol, tobacco, luxury goods and precious metals/gems will increase. The only question is by how much. Then there is the new player in the tax space to contend with as well – GST. The certainty about GST is that it will be introduced during the 2017-2018 fiscal. The uncertainty is whether it will be introduced in its current form which has polarised opinion or in a more watered down and less polarised format with amendments. Only time will tell, and in 6 odd months, we will have a definitive answer to these and other questions regarding Union Budget 2017.
Little needs to be said on the ordeal of Indian farmers in general and in the wake of demonetization, in particular. Farmers were virtually cashless to buy seeds in the mid of the sowing season in November and December when the higher order currency in India went illegal. Despite the fact that the official data has suggested that sowing been more in 2016 vis-à-vis the previous year but this could be due to possession of seeds in advance. Hence, showing estimates of this year may be misleading to evaluate the impact of demonetization on Indian farmers.
A series of announcements are awaited for the agriculture sector and Indian farmers to relieve them from the pain of demonetization. The government has already waived of interest for 60 days on existing farm loans for the latest Kharif and Rabi crops.
“Make in India” happens to be one of the signature initiatives of current Prime Minister Narendra Modi, to give an upbeat euphoria to the country’s manufacturing sector, especially regarding jobs creation and reviving exports. In this budget, which is a few hours away, one can expect a series of tax incentives for the labour-intensive leather, gems and jewellery sector.
This budget is expected to witness some upward revisions in the scope of existing localisation clause of import duties on mobiles and tablets, especially which can bring about a paradigm shift in the current manufacturing ecosystem, moving from semi knock-down (SKD) to complete knock-down (CKD). Hence, ensuring increased focus towards the development of local components ecosystem.
R&D sector needs a major boost in the upcoming budget as a digitized economy with initiatives like Make in India can succeed only with hardware and software localisation. This will not only augment job opportunities in the sector but will also ignite the movement towards skilled labour market in India.
Start-ups in India
The Union Budget 2017 may have some good news for the start-ups too. Finance Minister Arun Jaitley is expected to announce initiatives to empower the country’s start-ups, including the widening of the tax-free regime to five years from three years and faster procedural clearances. The move to extend the tax holiday from three years to five years, likely to be announced in Budget 2017, will come a year after PM Modi launched the ‘Start-Up India’ programme in the national capital.
Since the rail budget now comes integrated with the Union Budget 2017, one can clearly see the built-in emphasis of the government on infrastructure development. With private investment still not kicking in, the government probably recognises the importance of spending on infrastructure. Further, this move will free the state-owned behemoth from having to deal with stressed finances and political populism. A combined budget could imply that the Indian Railways can avoid setting aside funds for dividends of about INR 10,000 crore to the government every year, but the passengers are expected to spend more out of their pockets further as the railway ministry may impose a particular cess on train tickets to fund the Rs 1.20 lakh crore safety fund– Rashtriya Rail Sanraksha Kosh.
The focus on solar and wind power and highways and inland waterways could continue.
All in all, this budget is much awaited… awaited even more than before given the turbulent times that the people of India have gone through recently. Budgets are juxtaposed to economic situations; needed to spur growth, needed to focus on deficits, needed to have revised sectoral allocations and at times just to retain the status quo but this budget comes amidst a gloomy and sulk economic environment and expectations wherein consumerism has been hit the hardest and market sentiments are pessimistic (after demonetization) and this budget, thus, being eyed as the only light at the end of the tunnel!0