Perhaps the biggest plus of this budget is that it brought no negative shocks. And no bad ideas like farm loan waivers.
Hence the massive relief rally on Dalal Street. And the economists are relieved that foolish ideas have been given the go-by.
Arun Jaitley’s Union Budget for fiscal 2017-18, his fourth, is notable precisely for its lack of fireworks. Given the context of demonetisation and the need to stimulate growth, the budget did not propose major concession to too many sectors, barring real estate. In fact, Jaitley passed up the opportunity provided by DeMo and a forthcoming shift to a goods and services tax (GST) regime to break out of the fiscal deficit straitjacket. He accepted the 3 per cent target for 2017-18 as one he will try to achieve while giving himself leeway up to 3.2 per cent, which is lower than 2016-17’s target of 3.5 per cent. The direction of fiscal consolidation is consistent and prudent.
The government’s currency swap plan to withdraw Rs 500 and Rs 1,000 bank notes from circulation as a way to demonetise is being hailed by many banks and experts as the ultimate weapon against black money. However, demonetisation, as a strategy, isn’t new and has been tried before with limited success.
Here’s what former Reserve Bank of India governor Raghuram Rajan once said during a lecture on the topic of demonetisation and if it worked.
Rajan: I am not quite sure if what you meant is demonetise the old notes and introduce new notes instead. In the past demonetisation has been thought off as a way of getting black money out of circulation. Because people then have to come and say “how do I have this ten crores in cash sitting in my safe” and they have to explain where they got the money from. It is often cited as a solution. Unfortunately, my sense is the clever find ways around it.
They find ways to divide up their hoard in to many smaller pieces. You do find that people who haven’t thought of a way to convert black to white, throw it into the Hundi in some temples. I think there are ways around demonetization. It is not that easy to flush out the black money. Of course, a fair amount may be in the form of gold, therefore even harder to catch. I would focus more on the incentives to generate and retain black money. A lot of the incentives are on taxes.
My sense is the current tax rate in this country is for the most part reasonable. We have a reasonable tax regime, for example, the maximum tax rate on high-incomes is 33%, in the US it is already 39% plus State taxes, etc., it takes it to near 50. We are actually lower than many industrial countries. Given that, there is no reason why everybody who should pay taxes is not paying taxes. I would focus more on tracking data and better tax administration to get at where money is not being declared. I think it is very hard in this modern economy to hide your money that easily.
The original article appeared in The Huffington Post and is available here.
The original post is written by Rajat Sharma from our Mastermind, Sanasecurities and can be found here.
Goods and Service Tax (“GST”) is a comprehensive tax on manufacture, sale and consumption of goods and services, that will absorb most of the indirect taxes levied by Central and State Government. Currently the GST is adopted in over 150 countries. If passed, GST Bill would be THE biggest tax reform by the Indian government since inception of the Indian constitution.
How Will GST Work?
In India, GST would work on dual model which will include – C-GST collected by Central Government + S-GST collected by State Government on intra-state sales. GST reform would also feature an Integrated GST (IGST) collected by Central government on inter-state sales, which is to-be divided between Central and States Government in a manner decided by the Parliament on recommendations by GST Council.
By doing away with several Central and State Taxes, GST would diminish the cascading effect of tax (or double taxation, whereby the same product is taxed at the stage of manufacturing as excise, then as VAT/ sales tax on sale and so on.), which is prevalent in the current tax framework. Being a consumption-destination-based tax, GST would be levied and collected at each stage of sale or purchase of goods or services based on the existing input tax credit method. Current tax structure works on production-origin-based system i.e. goods and services are taxed differently on each stage of production.