Wednesday, January 16, 2013

Budget 2013-14 the tough lines

Budget 2013: Bold initiatives needed in a tough year ahead.

In the political context of the nation, it is difficult to expect the Budget 2013 would either be path breaking or reformist. General Elections are due in 2014 and the 2014 Budget would therefore be vote-on-account budget. The current budget is in the backdrop of low growth continuously for two years both in agriculture and manufacturing with no early hope of revival, unabated inflation albeit marginal fluctuations and rising current account deficit- the highest so far at 5.2%. Fiscal Budgetary Management has already been put on the backburner. RBI has put out a report on State Finances this month that dries up any further hope on States coming to the rescue of the Centre in containing the fiscal cliff we are nearing. FM started his discussions with the stakeholders to see where he can gain the corners.
One of the fundamental principles of taxation is: at the higher levels of income, the tax has to be progressive and at the lower level, regressive. The Direct Tax code kept this in view. It is not unlikely that as the system matures and cash economy gets lessened, the tax rates would be further rationalized from the existing three slabs of 10, 20 and 30 percent of the taxable income. All exemptions shall be withdrawn. But at the moment there seems to be remote possibility for any further rationalization of rates.
The recent hike in fuel and gas prices and the rationalization of related subsidies as also the rise in rail passenger fares leave no hope of inflation coming down. Monetary policy of the RBI towards the fag end of this month may at best make marginal changes bowing to pressures of the stakeholders and the government. Leaving to itself the RBI should prefer to keep the rates unchanged. Hence the fiscal measures are the only remedy.
Incentives for investments should come from the growth rather than through the exemptions and fiscal management. The measures to ensure growth need not necessarily come from patting the rich and an open invitation to the dollar economy to take over India. In the context of our poor rank in the league of nations at 97 out of 131 in the Economic Freedom Index, it is time to revisit the perverse incentives in health and education sectors and reverse them. If the FM tackles health and education sectors and increases investments to ensure good health, safe drinking water, universal free education up to class X, growth will emerge as a natural process due to enhanced people’s ability to work hard, save a good pie for productive consumption and healthy recycling of the economy.
My suggestion would be: let each corporate hospital provide 20% of every type of health service to the poor, women, and senior citizens on the basis of Aadhar and all such cost incurred by the Corporate should be qualified for exemption of tax. Similarly, all educational institutions that admit 20% of the students belonging to the poor for providing learning and learning tools, again on the basis of Aadhar information, not on the basis of caste or creed shall be also similarly exempt from tax. Universal education would be a goal nearer to achievement in the process.
In fact, I would venture to suggest that the best way to reduce imbalance and ensure growth is through increasing the share transaction tax from the current level of just 0.15% to 0.35% at both the ends of the transaction. There will be a hue and cry immediately after such increase but the dust would settle down eventually. The philosophy behind is that the buyer sells for a future gain and the seller sells for avoiding immediate loss (a loss of expected surplus). In a way both are gainers. The tax is paid out of only the surplus. The tax is not going to be regressive just because it is done at both ends of the transaction. The tax collection expenses is almost nil as the de-mat account generates the tax payable, deducts at source and immediately it gets into the Government Treasury. There is no tax collector or tax inspector here. The tax income so collected is available to the Government immediately for investment in either social expenditure like the pensions payable to the widows, physically handicapped and the like or for meeting the natural calamities immediately after their occurrence. Actually, to this extent even the corporate tax structure can be rationalized from the subsequent years. This would help the Fiscal Responsibility Budget Management significantly.