Ideas for a dream budget from Jaitley

I called Arun Jaitley’s first budget “a Chidambaram budget with a dash of saffron lipstick“. Jaitley made only minor changes from Chidambaram’s interim budget a few months earlier. BJP supporters said Jaitley had assumed office only in May, lacked the time for a radical overhaul by July, and so kept his powder dry for his second budget.

Well, Jaitley will present that second budget at the end of this month. This time he must reveal a vision that inspires, that shows resolve and clarity of purpose, and lights the way for the next four years.

This vision must aim to make India competitive with Asean in direct taxes by 2019. Remember, Chidambaram’s “dream budget“ of 1997 spelled out a strategy of lowering import duties in stages to the Asean level. That had the clear vision of India not just making ad hoc budget changes from year to year, but competing squarely with Asian miracle economies, making India a miracle economy too. That vision was so compelling that it was accepted by the next two finance ministers, Yashwant Sinha and Jaswant Singh, and more or less implemented by 2004. It was a resounding success -it helped India grow at 8-9% for most of the next decade.

In similar vein, Jaitley’s vision should aim to match Asean direct tax regimes by 2019. That will complete the strategic aim of being fully competitive, in both direct and indirect taxes.

Currently, India has among the highest tax rates in Asia, but also hordes of exceptions. A move to Asean rates will mean reducing India’s direct tax rates and simultaneously abolishing innumerable exemptions and exceptions. Jaitley’s first budget went the other way, introducing several new small exemptions and exceptions to help this vote bank or that industry. That must stop.

India has gained an unfortunate reputation for “tax terrorism“. Jaitley’s first budget reiterated the sovereign right to retrospective taxation. This sent a very wrong message about his priorities, even if it was technically correct. Here again, a pledge to move to Asean practices will greatly improve the investment climate.

Jaitley must stick to the path of consolidation he laid out last year -reducing the fiscal deficit to 3.6% and 3.0% of GDP in the next two years. Some of his advisors, notably Niti Aayog chief Arvind Panagariya, have made the case for living with higher fiscal deficits to finance urgently needed infrastructure. Sorry, but that would seriously dent Jaitley’s fiscal credibility. To establish a tall reputation, he absolutely must stick to his deficit reduction schedule.

Infrastructure is in a mess, and the public-private partnership model is broken. Infrastructure companies cannot repay humongous debts, and have dragged down banks that financed them. The government must increase its share of infrastructure financing until a new, viable PPP model is created.

The extra funds should not come from larger fiscal deficits but from sales of other government assets -PSU shares, shares held by SUUTI, spectrum, mineral blocks. An additional road cess of Rs 2 per litre can be imposed on petrol and diesel to finance more roads. The railways and port trusts have huge areas of surplus land in valuable city centres that can yield large revenues through lease or sale.

This approach must include the conversion of departmental undertakings into corporations. Railway minister Suresh Prabhu says he urgently needs vast new investments. The government has opened up FDI in non-operational railway activities. But foreign and Indian investors can invest only in corporations, not in government departments. The railways and port trusts must be converted to corporations, which can then attract massive private investment and loan funds. That will also hugely improve incentives for good management, and reduce populist pressures on their functioning.

Raising tax revenue is never a pleasant task, but there are many low-hanging fruit. Cigarette taxes bring in huge revenues, but taxes on beedis are tiny, since their manufacture entails lots of labour. Tobacco kills, whether in cigarettes or beedis, and the fact that beedis are labour intensive simply increases the number of manufacturers of death. The duty gap between the two must be closed drastically if not entirely.

India has a huge betting industry, especially for cricket and elections. This industry is illegal, yet irrepressible. It is no more sinful than tobacco or alcohol. Like these two, betting should be legalized and highly taxed.

These are just a few budget ideas that would be a breath of fresh air. Jaitley needs such ideas to produce a budget to be remembered.

4 thoughts on “Ideas for a dream budget from Jaitley”

  1. Respected Sir,

    I am a regular reader of your articles in ET. Everyone should agree with your opinion on containing Fiscal deficit. Also to fund ambitious infrastructure projects like interlinking all rivers, defence modernization, etc., we need revenue. The constraint is to raise revenue without increasing tax rate.

    You have mentioned to reduce fiscal deficit by selling shares of PSU companies and sale of surplus lands held by Government departments or PSUs. However raising revenues through this model is like selling family assets to run daily operations and every citizen wants the government assets to grow and not to deplete.

    In such a scenario widening of tax base is the only option we have. I am sure there is enough unaccounted money (be it politicians, businessmen, etc.,) which might be brought under tax net. Even our tax authorities are having the habit of demanding more taxes from existing tax payers rather than bringing new tax payers or identifying tax evasion avenues by existing tax payers.

    As I am typing this comment, I am reading an article in “MNCs may have to disclose details of HQ ops to IT” and we want to improve the investment climate!!!

    Below I have mentioned few ideas through which we could widen the tax base. I am sure many economists, ministers, tax consultants, government authorities would have thought over it, but no one is ready to implement or discuss such low hanging fruits.

    1) The government should take with necessary steps to reduce cash transactions at all levels and bring them under bank transactions. This can be done by bringing back BCTT, mandatory use of Rupay cards for purchase of small value items and services, and penalties for holding excess cash on hand. When our citizens are ready to open bank accounts and able to withdraw gas cylinder subsidies why can’t they use the same for all transactions!!!

    2) At present, loans above Rs. 20000/- can’t be taken by cash. This upper limit should be eliminated and any loan can be made by way of bank transfers only otherwise the loan should be treated as void. Not only this will reduce evasion but also harassment of helpless borrowers from clutches of shark money lenders.

    3) Bring NGOs, religious and political trusts under tax net. We should give tax exemption for companies which contribute for development of economy and not for religious temples, churches, mosques which promotes their own religion and not country’s development. If religious funds are taxed the chances of communal violence will also reduce.

    4) Every individual taxpayer should file their assets and liabilities in a simple e-return format with income tax department. It might appear as big mammoth exercise, however with help of technology and proper training to income tax employees, finance ministry will be able to make great use of this data. The government should make it mandatory for citizens to file this return before any purchase of items (including real estate, gold, shares, MFs) above Rs. 20000/-. The assets declared should contain the details like quantities, location, date of purchase, current market value, etc. If any asset details are not declared during a year it should be treated as tax evasion and relevant provisions to be applied.

    5) GST returns (when introduced) needs to be furnished by everyone irrespective of whether they are dealing with exempted product or their turnover is below the exemption limit. Anyone operating a CURRENT account in banks needs to comply with mandatory filing of GST returns and need to submit the acknowledgement of GST returns with bank to operate their current account further. The frequency of GST return filing may be reduced from monthly to quarterly or half yearly for dealers having exempted product or having low turnover. Many businessmen are reducing their profits by getting bogus bills from various people. These bogus bills contain purchase of exempted goods or from a person who is having very low turnover.

    6) Government should come with strict punishment like imprisonment for evasion of taxes above Rs. 20 lacs by a citizen. Also person charged with tax evasion or a director of a company charged with tax evasion or fraud should not have access to bank loan funds in future. Corruption and Black money are twins and both needs to be dealt on similar manner, rather than treating corruption alone as the problem plaguing country’s development.

    7) When almost all banks have implemented Core Banking Solution, the IT department is not able take all bank deposits held by a person during a year by click of a button!!! The tax payers are clever in opening multiple bank deposits with multiple banks and branches. With use of PAN and Aadhar numbers, many details of transactions can be made available to respective income tax authorities.

    Some of these measures might be radical but the mandate that BJP government got is also radical. Rather than tinkering with tax rates and exemptions we need to keep it as it is and increase measures to widen tax base.

    I am just sharing my thoughts with a good economist like you as I am puzzled why these basic controls relating to widening tax bases are not discussed in public forums and taken up by finance ministry.

  2. Very valid ideas sir. But I must say, most of these have already been tried and achieved limited success in the past. I would like to hear of ideas which have not been tried before. Dosent matter how small it is. Ideas which are not related to generic (on paper) factors, but related to structural changes. The usual thoughts of taxation structure, higher taxation, disinvestment are tried and only partially useful.

    We need changes which will make sure that people dont opt for money being black. Making vices legal is an option but thats where out of the box thinking is needed, a solution which can make black money unnecessary while keeping vices at bay.

    How to make macro economic items micro economic, while sustaining pace of growth. We need a program which can do what panchayati raj did to administration.

  3. you didn’t give reform ideas for retail sectors such as raising tax exemption limit. Anyway, all said and done Jaitley is not a good man for the aam aadhmi. Yashwant sinha is pro AAp. So, let us hope that Sinha jr (Mos finance) will get ideas from his dad and give bold concessions to the common man in this budget. I suggest govt have a plan for more FDI in various sector including petrol/diesel marketing, railways and pharma.
    my suggestion: no triclke down policies. only wealth redistribution policies such as surcharge for wealthy executives

  4. sir, i also request you to embrace ideas of C K prahalad (Author, The fortune at the bottom of the pyramid) and Dr manmohan singh -who believes that India’s growth is best ahceived through boosting domestic consumption

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