Opinion | These Are The Budget's Two Key Messages For The Future

There is always a lot of anticipation ahead of a Union Budget announcement in India. Experts and others had plenty to say about what the finance minister should prioritise: cutting taxes, boosting capital expenditure, or reducing spending on social welfare, often seen as freebies. This time, there was a surplus of advice on how the government should use funds that came by way of bumper dividends from the Reserve Bank of India.

However, when the actual document was revealed, it seemed many of these expectations were skipped as the government remained steadfast in its goal of fiscal consolidation. Alongside this, there are some clear messages that should be noted for the future.

Fiscal Prudence

The primary message is the government's commitment to adhering to the Fiscal Responsibility and Budget Management (FRBM) path, aiming to lower the fiscal deficit to 4.5% of GDP initially, with a further target of 3% in due course. This consistent stance should be considered when speculating on future actions by the Finance Minister, showcasing the government's resolute stance while addressing the global audience.

The Budget entailed a comprehensive speech outlining aspirations and ideologies, supported by detailed documents covering revenue and expenditure sides. Summarising the numbers, the total outlay has increased by approximately Rs 55,000 crore compared to the Interim Budget. Tax revenue targets are set Rs 18,000 crore lower, yet the fiscal deficit has reduced by about Rs 73,000 crore. Notably, the higher non-tax revenue, largely from the RBI surplus, amounts to around Rs 1.46 lakh crore, setting the framework for all subsequent announcements.

What Taxpayers Get

On the tax front, there are discernible signals. First, all individual taxpayers are encouraged to transition to the new tax system, with current incentives focused on standard deductions and revised tax rates. Expectations for concessions under Section 80C and interest on home loans remained largely unmet. That mostly aligned with the broader objective of simplifying the tax system with lower rates and fewer exemptions. It looks like even incentives for investment in the new pension scheme (NPS) could potentially phase out in the near future.

Second, regarding capital gains, the direction is pretty clear. The taxation of equity markets has gradually evolved, with debt mutual funds losing long-term capital gains tax status, and dividends on shares and mutual funds becoming taxable. The tax-free status of equity gains has been revised to 10%. These changes aim to establish a level playing field across financial instruments, suggesting clearly that equity gains could eventually be taxed similarly as gains from other asset classes.

Third, the removal of indexation for property is quite significant. This sounds unusual since most houses are typically purchased by individuals leveraging their finances. For instance, assuming that a house costs Rs 1 crore and there's an 8-9% interest rate paid over 10-15 years, the effective cost can double the purchase value. Indexation logically mitigates this effect. However, its withdrawal implies that all received money will be treated as income and taxed according to regular tax slabs. There is a concern that this could encourage a flourishing black economy, mirroring the current prevalence of cash transactions in the real estate sector.

Simplifying Compliance

That aside, it is plausible that in the next five years, income from all sources will fall under a single tax regime with minimal concessions, simplifying tax compliance by eliminating discrepancies. That seems to be the broad direction we are headed in. It will result in ease of compliance as well.

On the expenditure front, the Budget continues the private sector norm of 'performance-linked allocation'. Thus, incentives for hiring new staff are tied to company registration with the Employee Provident Fund Organisation (EPFO). Moreover, to discourage free rides, first-time employees must pass specific tests to qualify for benefits.

For MSMEs, the credit guarantee for unit loans will be a contingent liability managed through the banking system, necessitating new rating models. Allocations have notably increased for rural and urban sectors, with funds tied to performance metrics such as home purchases.

As a result, despite the pre-budget hype and multitude of expectations, two principles stand out for the medium and long-term: steadfast adherence to fiscal prudence and a simplified, uniform tax structure devoid of concessions. That has been the overarching theme of the budget this time.

(The author is Chief Economist, Bank of Baroda, and author of 'Corporate Quirks: The Darker Side Of The Sun')

Disclaimer: These are the personal opinions of the author