The Union budget 2018-19 will be the first post-GST budget of India. It is also the last full budget before the 2019 general elections. It will be something everyone will be looking forward to the light of the recent slowdown economy. We take a look at the likely big bang and the great expectations to set the economy back on course.
The middle class is likely to get some relief in the 2018-19 budget which is expected to reflect a please-all strategy as it is the last regular budget of the BJP-led government ahead of the general elections in 2019. The finance ministry is considering a proposal to hike the personal income tax exemption limit from Rs 2.5 lakh per annum to Rs 3 lakh or more and also introduce some changes in the tax slabs to lighten the taxpayers' burden.
The government is working on various combinations and permutations to arrive at the right mix which ensures that the tax burden is not unreasonable and at the same time enough resources are mobilized for infrastructure development. The government is aware of the fact that middle-income families are facing the brunt of rising inflation and easing the tax burden would provide some relief. A reduction in the tax burden would also place more disposable income in the hands of consumers which would increase the demand for goods and services and spur economic growth.
The flip side is that the tax base is very narrow and the government is struggling to bring down the fiscal deficit which poses a major constraint in providing tax concessions beyond a point. Finance Minister Arun Jaitley will have to do a fine balancing act. He had left the tax slabs unchanged in the 2017-18 budget but provided marginal relief to small taxpayers by reducing the rate from 10 per cent to 5 per cent for individuals with annual incomes between Rs 2.5-5 lakh.
Clearly, the budget will have to have a pro-farmer tilt which means more resources have to be mobilized for agriculture and rural development. The finance ministry is also considering a suggestion to provide a tax exemption on fixed deposits in banks in the same manner as mutual funds in order to encourage savings by households so that more funds come into banks. These can then be used to extend loans.
The holding period for short-term capital gains (STCG) tax on listed securities may also be extended from one year to three years, bringing equities on a par with some other asset classes in tax treatment. This is among a number of measures for the capital markets that may be announced in the Budget for 2018-19. The STCG tax on stocks and mutual funds is 15 per cent at present. Listed securities held above a year do not attract any tax.
Industry chamber CII has in its pre-Budget memorandum to the finance ministry sought a reduction in the peak tax slab from 30 per cent to 25 per cent. However, it is unlikely that the ministry will concede ground due to pressure on the fiscal deficit. The subdued indirect tax collection following the rollout of the Goods and Services Tax from July 1 last year has put pressure on the fiscal deficit, which has been pegged at 3.2 per cent of the GDP for 2017-18.
The government recently raised the borrowing target by additional Rs 50,000 crore for the current fiscal to meet the shortfall. However, the government expects GST collections to pick up in the next fiscal as the teething problems of the new tax regime are being resolved.
After the budget-2017, which was referred as mediocre, this will be the last full budget of Modi-led NDA government for this term. Different sectors have high expectations for the much-touted economic reforms. Let’s take a quick look at what can be expected from this new budget :
Tax Structure
This year, the indirect tax structure of the country was given a facelift with the new Goods and Services Tax (GST) regime. And in Union Budget 2018, we can expect changes in the direct tax structure including income tax. To review the existing structure of direct taxes in the country and the related exemption norms, a task force has been created by the government which is headed by CBDT member Arbind Modi. The idea is to make direct taxes more contemporary so that it matches the current requirements.
Infrastructure
Infrastructure is also expected to be a priority in the upcoming Budget 2018. The new budget will put the impetus on developing rural infrastructure. Under the Bharatmala project, the biggest ever highway development plan has already been approved by the government. Urban infrastructure, housing, water and sanitation needs are also expected to be discussed at the new budget announcement.
Recapitalisation of Public Sector Banks
A mega recapitalisation plan was announced by the government in October to counter the rising bad loans of public sector banks. The plan is worth Rs 2.11 Lakh Crores out of which Rs 1,35,00 crore will be in the form of front-loaded recapitalisation bonds. Though the government has not shared the details on the types of bonds or the interest rates on these bonds, the news itself has created quite a buzz in the bonds and equity markets. The government is expected to raise around Rs 70,000 crore by February 2018 and the budget will also be announced in the same period.
Apart from these major reforms, several economists are urging the government to cut corporate tax rates in order to make the Indian industries competitive on a global level.
A Business Standard news report has claimed that the government is planning to abolish dividend distribution tax (DDT) which currently features an applicable rate of around 20%. As per existing rules, DDT is applicable to dividends distributed by mutual funds as well as other domestic companies that are desirous of distributing dividends to shareholders. As per the Business Standard report, the abolition of DDT is expected to encourage companies to announce higher dividends which would improve yields for investors.