Analysis of Budget 2017-2018

The Budget for 2017-18 shows interesting data on the fiscal figures. The finance minister said the tax collection has gone up by INR 73,000 Crore in indirect and direct taxes.  

Fiscal deficit is around 3.5 % and the Revenue deficit has come down to 2.1% from the budgeted 2.3%, which is very good news. Spending is within control and tax collection has gone up by 17%. Last year also it went up by 17% - this is largely because of oil; but that being said, there has been good momentum on tax collection. For the next year, estimates indicate tax collection would go up only by 12.3% - indirect taxes at 8.8% and direct taxes at 15.3%. We have to be very cautious in looking at indirect taxes because the GST is going to come and we don't know the impact of GST. For next year too, the finance minister has moderated borrowings with the fiscal deficit set at 3.2%. Because with GST coming in, we have to make sure there is enough on the fiscal space. On the fiscal space, I think we should give the Finance Minister 9 / 10 because he has done remarkably well.

Now if you look at the focus on the budget – it's a political budget with a focus on farmers, rural area, on the poor, on women, on infrastructure, on digital economy and bringing in good governance. In all these areas, there's an increase in allocation – especially for farmers, for the rural sector. Rural housing is a big focus in this year’s budget. The MNREGA program has done well and hence he wants to create more assets in rural areas.  

If one looks at education, the finance minister has said that there will be reforms in education and good universities, both public and private, will have more academic freedom. 5000 more seats are going to be there in post-graduate medicine, which is good news. He has also said that the Medical Council and UGC will be reformed. Increased allocation has been done for skill development which is a commendable move.

For transportation sector, a provision of INR 2,41,387 crore has been made. A new Metro Rail Policy will be announced which will focus on innovative methods of implementation and financing. The budget allocation for highways has been increased to 64,900 Crore from 58,000 Crore. Railway lines of 3,500 kms will also be commissioned in the coming Financial Year.

As far as urban infrastructure is concerned he has not mentioned much and I don’t know see any increased allocation. Urbanization will create jobs and urbanization is required – India is not a rural economy anymore – the rural sector contributes only 25% of GDP but maybe 60% of people are living in rural areas. Unless there is a focus on urbanization, India will not grow at the pace required nor will we create jobs.  

In terms of governance, I think there has been a very radical move, for which the finance minister needs to be complimented. He has said that anonymous political contributions in cash has been limited to INR 2000 per person from INR 20,000, which is very good and will reduce the use of black money in elections. He has also said that one can buy a special electoral bond from the RBI and give the money to political parties, which will encourage more people to contribute to political parties by cheque – which can be traced. He has also said that if political parties have any extra cash receipts he is going to tax them, which is also a very good move. I think this is a fantastic move which is coming after so many years and the government needs to be complimented. This will definitely improve transparency and make sure black money reduces. 

The war against black money continues except that in personal taxes between what he says about black money and what he has done, the divergence is wide. The major problem with personal taxes is that people who are in business and profession do not declare their full income in the tax bracket between INR 5 Lakh and INR 25 Lakh – this is referred to as the "missing middle". Up to INR 5 Lakh income, he has reduced the tax to 5% from 10%, which is good. But in the INR 5-25 Lakh bracket, barring this decrease in the first bracket, there is not much benefit. He should reduce the tax by 5% in this bracket too, to make sure that more people declare their money. For honest salaried class who work hard and make more than INR 50 Lakh, he has hit them badly with a surcharge of 10%, which is uncalled for. If you're a businessman and you've got an income of more than INR 50 lakh, you'll know how to reduce your income and not pay the surcharge. But if you're an honest salaried employee, then it hits you very badly. He has said that he wants to incentivize more honest people, but the finance minister has possibly conveniently ignored the honest people in the higher tax bracket with this surcharge proposal.  

As far as corporate tax is concerned he has reduced it to 25% for companies with a revenue of up to INR 50 Crore. The effective tax rate for FY 2015-16 is 28.24%. But he should have reduced it to 25% for service companies and for banks, which provide a large number of jobs. The manufacturing sector pays only 25.86% effective tax and enjoys capital allowances of INR 54,300 Crore as per the budget. Whereas the banks pay a tax of 30%+ and all service sector companies pay a higher tax rate. They should have seen some benefit to make sure they produce more jobs.  

As far as the job sector is concerned, there is a lot of talk, but there is no specific provision to increase jobs, except for skill development and spending on infrastructure. India's big issue is that there are 60 Lakh people coming out of colleges every year. There are 3.3 Crore youngsters currently in colleges. Where are the jobs for them? All of them want white collar jobs. The infrastructure sector, the rural housing sector and all these sectors are not going to create the white collar jobs that these youngsters require. The Patel agitation, Gujjar agitation, the Jatt agitation, and all these agitations, are all because of a lack of jobs for educated people. There is nothing in the budget to increase jobs for them. Unless you make the service companies grow more, unless you reduce the taxes biased against job creation for the service companies you are not going to change the condition.  

There has not been much talk about tax terrorism. As on 31st March 2016, INR 9.30 lakh was stuck up in arrear demands. Many tax disputes continue to be made. There is continuous tax harassment for the corporate sector and disputes have increased. The finance minister has not spoken about this area, except to say that by digitization and better assessment and by making people file one sheet tax form that they are going to reduce tax terrorism. But the tax terrorism is for the corporate sector not for the individuals. Yes, a few individuals are a victim of tax terrorism but the corporate sector is largely the victims of tax terrorism across the board and that is where the focus should have been, but sadly it is not.  

For startups and AIF funds, AIF 1 and 2, investors will not be indirectly taxed and some measures of easing (tax break for 3 years out of 7 years) have been announced for startups which is again great news. More needs to be done for the startups.

Overall, one would say that it is a good budget. The budget continues the trend that has been set in the last few years, but it could have been more transformative. But I guess he was more conservative because of GST and though he has given some benefits to ease the pain of demonetization, for the larger companies to produce jobs, he has not yet kept his promise of reducing the corporate tax rate to 25% nor his promise of reducing tax terrorism for the corporate sector. So I would say overall, I would give him 8.5 / 10.