The exercise for the last full Budget of the Modi government 2.0 has begun and its broad direction has been laid by Finance Minister Nirmala Sitharaman. She recently said the next Budget will have to be “carefully structured" to sustain growth and contain inflation. She noted that India's biggest concern is the high energy prices in the near future.
The retail price inflation has not come down to the Reserve Bank of India (RBI)’s upper tolerance band of six per cent since January this year. In fact, it had stood at a five-month high of 7.41 per cent in September. With the average rate of price rise standing over six per cent in the three consecutive quarters, the RBI is set to write to the government explaining the reasons behind its failure to bring it to the tolerance level, suggesting remedial measures to contain it in the band of 2-6 per cent and the time frame to do so.
Meanwhile, projections of the gross domestic product (GDP) growth rates for 2022-23 have been cut by various entities, including RBI. The highest cut was made by the World Bank by 100 basis points from 7.5 per cent earlier to 6.5 per cent now.
Besides, the index of industrial production (IIP) contracted 0.8 per cent in August, showing weakness in the production of industrial goods in volume terms.
Economist Nouriel Roubini, who correctly predicted the financial crisis in 2008, now said that the US and the rest of the world are about to face an ugly and long recession.
Roubini expected the next recession to hit in late 2022 and last for all of 2023.
Roubini earned his nickname — Dr Doom — for correctly predicting the 2007-2008 crisis and saying people should expect huge debt ratios for governments and corporations.
He said many zombie countries, shadow banks, banks, corporates, zombie households, and zombie institutions would die.
Roubini warned that recession will drag the global markets down because of debt levels worldwide, and it will be impossible for the Federal Reserve to keep inflation down to 2 per cent.
World Trade Organisation Director-General Ngozi Okonjo-Iweala also said, "I think a global recession — that is what I think we are edging into.”
But what can the Budget do to counter the impact of the recession and bring down high inflation?
Amit Maheshwari, tax partner, AKM Global, said a global recession is very likely expected due to high energy prices, runaway inflation due to past loose monetary policy, geo-political uncertainty and unsynchronised global monetary tightening by central banks.
India has done fairly well in the last few quarters compared to the last year and is expected to remain resilient compared to other developed and emerging markets.
He said the government will look forward to maintaining this momentum ahead to build on India's recent success and push forward the case for investments in India as a credible alternative to China.
The taxpayers at a personal front shall look forward to increased exemption/deduction limits in the background of high inflation, Maheshwari said.
“They would be looking for tax reliefs in terms of enhanced deductions for home loans since housing loan interest rates have increased multiple times in the last few months, increased deductions of health care insurances, increase in the standard deduction, simplification of tax regime into one single tax regime as there are new and old regimes available at present. Another important area is a reduction in surcharge rates for high-net-worth individuals so that they continue to contribute to the economic development by staying in India”, he added.
From 2020-21 onwards, the Budget gave an option of a lower personal income tax regime to those earning up to Rs 15 lakh, provided they forgo some exemptions. The new tax slabs now stand at five per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent and 30 per cent. The old regime has the same 10-20-30 per cent slabs. Meanwhile, the surcharge on income tax went as high as 37 per cent for those earning over Rs 5 crore in a year.
Even if a taxpayer opts for a new tax regime, certain exemptions such as money received for gratuity, leave encashment, voluntary retirement scheme etc, are still available. There are also various deductions still available, such as conveyance allowance for expenditure incurred for travelling to work, investment in notified pension schemes, any allowance for travelling for employment or on transfer, etc
Maheshwari said, "We don’t expect any corporate tax rate reduction and in fact could see marginal increases to fund expanding welfare schemes for the poor. Due to the economy being resilient compared to other countries, there is a weak case for any across-the-board reduction in tax rates to stimulate the economy."
In September 2019, Nirmala Sitharaman gave an option for domestic companies to avail of a lower tax rate of 22 per cent (25.17 per cent inclusive of a surcharge of 10 per cent and cess at four per cent). No exemption or incentive shall be allowed to be claimed by such companies under this regime. Additionally, no minimum alternate tax (MAT) would be levied on such companies.
Also, in order to give a boost to the ‘Make-in-India’ initiative, fresh investment in a company set up after October 1, 2019, in the manufacturing sector would have an option to pay tax at the rate of 15 per cent (17.16 per cent including surcharge of 10 per cent and cess of four per cent), provided such company starts manufacturing on or before 31 March 2023. This date was later extended by one year.
A company that does not opt for the concessional tax regime and avails of the tax exemptions, and incentives, would continue to pay tax at the pre-amended rate of 30 per cent (approximately 34.94 per cent with cess and surcharge). However, these companies can opt for the concessional tax regime after the expiry of their tax holiday, or exemption period and the MAT rate for such companies will be reduced from 18.5 per cent to 15 per cent. The option once exercised cannot be withdrawn subsequently.
An analysis of the impact of the concessional tax rates for companies shows that 15.85 per cent of the companies having 62.01 per cent of the total income have opted for the 22 per cent tax scheme and 0.14 per cent of companies with a minuscule income opted for taking benefits under the 15 per cent tax regime in 2019-20.
However, Maheshwari said targeted incentives/breaks to help make globally competitive supply chains are expected.
Sudhir Kapadia, partner, tax & regulatory services, EY India, however, cautioned that fiscal support measures alone may create an artificial demand in the economy leading to unrealistic price increases of assets as well as goods and services.
He said the finance minister should continue with supply-side measures, especially sharper focus and execution of CAPEX and Infra-projects which have stood India in good stead through the tumultuous Covid times.
"Therefore, the focus should be on accelerating the implementation of the announcements made in the last two Budgets such as the Gati Shakti Plan, National Monetisation Pipeline and PSU divestments,” he emphasised.
The government had raised the capital expenditure by 35.4 per cent from Rs 5.54 trillion in 2021-22 to Rs 7.50 trillion in 2022-23. The government has spent about 34 per cent of this amount till August of the current financial year.
Maheshwari said the government with an intent to boost investments is expected to focus on incentivising industries through several schemes like production-linked incentives (PLI schemes), and Make in India incentives, especially for evolving sectors such as technologies, start-ups, electric vehicles etc. Digitalisation and internet (5G) support shall play a significant role in achieving the targets set by the government.
"FDI shall continue to be encouraged in the upcoming years as well. Promoting infrastructure in the major sectors such as health care, roads, automotive, and transport is an area which needs to be placed more thrust upon. Exports should be supported as this can have a corresponding effect of creating more jobs, earning foreign exchange etc,” he argued.