Union Budget is not corporate India’s wishlist. Tax breaks can’t solely drive profit

The incidence of GST is higher on the poor than rich. The public would be better off pushing for faster timelines for this rather than making plaintive appeals for income tax reductions.

Finance minister Nirmala Sitharaman chairs the sixth Pre-Budget Meeting with representatives of various Trade Unions | ANI

The Finance Ministry’s pre-Budget consultations are nearly over and they have yielded two broad and largely rhetorical questions. When did the Budget become a wishlist for all and sundry, regardless of the impracticalities of the wishes? And when did India’s private sector get reduced to constantly having its hand out, asking for more and more fiscal assistance with no commitments from their end?

The Budget, at its core, is a financial instrument to declare the government’s fiscal position and priorities. It became a political tool from the 1970s onwards, but now it seems as if households and businesses believe the finance minister transforms into a genie come budget time. And the limit isn’t capped at three wishes.

A review of the pre-Budget documents shared by the various industry chambers to the finance ministry shows that the bulk of the demands revolves around lowering various costs of doing business and increasing incentives for various sectors.

Here’s a direct quote from one of the documents: “Reduced costs of doing business, including costs of capital, costs of power, costs of logistics, costs of land, and costs of compliances, will boost competitiveness and decrease imports in sectors where India is capable”.

Another large industry body asked for the extension of the Production-Linked Incentive scheme to myriad new sectors.

Now, the point of highlighting this is not to say that these are not practical or necessary changes. The point is that the private sector now seems to be demanding these before it commits anything of its own. In other words, we are in a situation where the private sector seems to be telling the government ‘ensure we will make a profit and we’ll invest’.

Enough and more has been written on ThePrint and other news websites about how private sector investment has been tepid for too long, despite conditions turning favourable, and how this should be a concern for the government. That concern must remain—the government must facilitate business. And there’s a lot that still needs to be done in this regard. This article is not about that extensive list.

It is now time to ask the private sector some hard questions, too. They have become quite comfortable asking the government to continue increasing the amount it spends on infrastructure creation. One industry body even asked for 10 per cent of GDP to be spent on this, up from the current 3.4 per cent.

Reliance on subsidies, a slippery slope

Wishes from the private sector need to come after they have shown some commitment. The model must be along the lines of ‘we are investing in this sector, but here are the problems we are facing, please address them’ rather than ‘first make it eminently profitable to invest in this sector, and only then will we put any skin in the game’.

Increasingly, it looks like the latter model seems to be taking hold in the minds of corporate India’s leaders. There are several problems with this.

The first is that it saps the private sector of its vitality. Corporate India and startups have driven innovation in India. There’s nothing like the profit motive to push a company to find innovative solutions.

An over-reliance on subsidies—especially before venturing into a business first—can prematurely sate this hunger for innovation. Subsidies and tax breaks are great helping hands, but they cannot become the sole drivers of profitability.

The second problem with such a model is that it’s all about the wishes and no thought is given to the consequences.

The corporate India wishlist seems to suggest that they want the government to spend more and provide more incentives while also cutting tax rates and ensuring fiscal discipline is maintained. How is this possible?

Push for GST revision, not lower income taxes

Coming to households, the overwhelming bulk of their demands have to do with reducing income tax rates. This is much more understandable. Inflation has outpaced wage growth for the vast majority of India’s workforce, and so they want less of what they have left to go as tax. Fair enough.

The problem is, any likely reduction in income tax rates will barely make a dent in household finances. Only about 1-2 per cent of India actually pays any income tax, while about 5-6 per cent file income tax returns. Incomes up to Rs 7 lakh per year are already exempt from income tax. Even if this is hiked to, say, Rs 10 lakh a year, the overall impact on households across India will be minimal.

Similarly, a tweaking of the higher slabs to reduce the tax incidence on the middle class—while no doubt desirable—will impact only a tiny fraction of India’s population. This is not to say that it shouldn’t be done. It’s just that, even if it is, it’s not going to materially impact demand in the economy.

In fact, India’s households would be better off making demands of the GST Council than the Union Budget. A recent paper published by a professor from the National Institute of Public Finance and Policy points out that several parts of the GST regime are regressive—the incidence is more on the poor than the rich.

The paper finds that higher-income households make up a large share of those who consume items that are exempt from GST. On the other hand, lower-income households consume a higher share of the items in the 12-18 per cent brackets. That is, the poor are paying more of the higher tax rates and the rich are benefiting from zero tax rates.

This needs an urgent review. Finance Minister Nirmala Sitharaman on Saturday said the Group of Ministers tasked with reviewing GST rates will share a status update of its work only by August, when the Council will meet again. Actual deliberations will start only then, and will really pick up speed only once the GoM submits its final report.

The public would be better off pushing for faster timelines for this rather than making plaintive appeals for income tax reductions. GST applies to everybody making a purchase, after all.

Overall, the government must restore the Budget to its original purpose—just a statement of accounts. The wishlist of corporate India needs to be reviewed on a rolling basis through the financial year and must be pegged to achievements not just promises.

TCA Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.

(Edited by Theres Sudeep)