Some rationalisation is needed, but the net effect of tax changes in the Budget will have to be revenue neutral.
The corporation taxation regime is expected to be left by and large untouched with just a handful of changes. (Image/IE)
A combination of high inflation, increasing formalisation of the economy and collection efficiencies is the reason why tax revenues for FY23 are set to overshoot targets by as much as Rs 3 trillion. Against the budgeted gross tax receipts of Rs 27.57 trillion, the government is expected to mop up Rs 30.5 trillion, having hit 65% of the target in November. Over the years, governments have been increasingly relying on tax receipts to meet their expenditure. By one estimate, direct taxes as a share of overall receipts could account for as much as 70% in FY23—up from around 60% in FY20. Specifically, the share of personal income tax is tipped to hit 34% of receipts, up from 28% in FY20 and from 22% in FY15.
For the FY24 Budget, the government is estimated to target direct tax collections of about Rs 18.85 trillion, an 11% increase over the estimated collections for FY23 and in line with the expected nominal GDP growth of 10%. As is known, at 0.7, tax collections are highly correlated with growth. For corporation tax, the government could pencil in a growth of about 10.5% over FY23 collections, while for personal income tax, it could be a little higher, at 12%.
The corporation taxation regime is expected to be left by and large untouched with just a handful of changes. Sops might be announced as support for renewable energy and climate change-related expenditure. Indeed, tax incentives for green bonds, in the form of an exemption for the interest income, would no doubt help attract investments. There is a good chance the timeline for setting up new manufacturing companies at a concessional rate of 15% will be extended to beyond June 2024 since the pandemic has disrupted expansion plans of companies.
As has been happening in the last few years, import tariffs could be raised on finished products as the intent is to support local manufacture, through schemes like the Production Linked Incentive (PLI). This is unfortunate as it will make India uncompetitive in the long run and dilute the benefits of the PLI. While hiking duties on top-end items like helicopters or jewellery as a move to conserve foreign exchange is understandable, as a policy, high duties can be damaging. Given the huge backlog of cases being litigated, the government might resort to amnesty schemes to clear these and recover some money in the process. Since inflation is hurting low-income and even middle-income households, some relief in the form of lower income tax rates is justified and may be forthcoming.
To encourage taxpayers to shift to the new tax framework any exemptions or tax cuts should be introduced only for the new regime. Relief should be provided not just at the bottom but even at income levels of Rs 7.5-10 lakh. This could nudge people towards the new regime. Affordable housing might get a push with the rebate on home loan interest payments being raised beyond the current limit of Rs 2 lakh. A relook at the structure of long-term capital gains tax is also warranted to align rates, holding periods and indexation benefits across asset classes. The net effect of all tax changes would have to be revenue neutral because the government’s finances are stretched. With nearly 50% of the Centre’s net tax revenue being used to service the interest bill, there is little room for profligacy.