IP Bajpai
If you look at the pink newspapers, you would believe the budget is like Christmas, and Finance Minister Nirmala Sitharaman is Santa Claus. Everyone and their uncle wants something for themselves, for their industry, for farmers, workers, the middle class, and even for the stock market. Of course, it would lovely to have a low tax rate, say 20%, higher standard deductions, and no capital gains, especially for shares and the stock market. And yet, in all this clamor, no one says who is going to pay for any or all of these demands. Big problem.
The big problem is that while all of us want, none of us wants to pay. India has amongst the lowest ratio of tax to GDP (around 9-11% compared to 16.5% in Mexico; 23.1 % in Turkey; 24% in the US and much higher in Europe), the fewest percentage of taxpayers, and amongst the biggest black markets in the Group of 20. Black is back, in a big way, like it was before demonetization, and no one is trying to figure out where the government is getting the money to pay for all the goodies we want from the government.
The tragedy is that while everyone knows how to fix India by spending, no one knows or focuses on where to get the money from to finance these schemes. As the Prime Minister bemoaned, only 1.4 crore Indians pay income tax. That’s ONE PERCENT of the total population or just over 1.5% of the adult population. And that’s not the end of the story; of these 1.4 crores, more than 70% – or 1 crore – declare an income of between ₹ 5-10 lakh a year. That is between ₹ 42,000 and ₹ 85,000 per month. If you believe that this is the real India, you’ll believe anything.
The reality is that 20% of taxpayers account for 80% of the income tax collected. There are just 3.2 lakh people declaring an income of more than ₹ 50 lakh (Rs 4.2 lakh a month) and only 8,600 earning more than ₹ 5 crores. At the same time, the world wealth survey puts the number of Indians in the High Net Income category (net liquid wealth more than USD 1 million) as 2 lakhs. More than 40,000 luxury cars were sold annually before Covid, but only 1 lakh earned over a crore. Where does the money come from?
The same story is true of India’s other big bang reform (demonetisation the other) GST. It was meant to be the financial savior of the government, with the government estimating a 14% y-o-y growth. That didn’t happen by a long shot and Covid may have been a factor in the last two years, but if you bought the 14% annual growth in revenue, the monthly collection should, after five years, have been close ₹ 2 lakh crore by now. We aren’t anywhere near it; our best month has been ₹ 1.3 lakh crores.
Like income tax, the number of registered businesses is pitifully small. In a country that claims 5 crore retail shops, only 1.23 crore businesses are registered for GST. Secondly, even with the registered and paying population, just 6.5% of businesses, mainly Public Limited Companies (including PSUs) and large private companies, account for 72% of the GST collection.* That is, 6.5 lakh businesses are the backbone of the GST.
The GST should have helped throw up more income tax payees, but because of politicians who kindly left small businesses (upto ₹ 40 lakh turnover completely and ₹ 2 crore marginally) out of the ambit, and bureaucrats that made the most complicated structure and compliances, no one wants to join the GST regime. It’s cheaper to pay off the inspectors than to register for GST.
The Finance Minister’s problems are compounded by the fact that almost 80% of her spending power is locked up in interest payments (45%) defence and salaries, so there is very little wiggle room. Within this, she has to meet populist election measures (an almost annual feature) as well as capital infrastructure. UP elections, as Home Minister Amit Shah puts it, will decide the future of India. We should expect more giveaways to voters there. Arun Jaitley’s gift of ₹ 6,000 annually to farmers (PM Kisan Scheme) costs the government more than ₹ 60,000 crore. The food and fertilizer subsidy, because of Covid, has seen greater procurement and distribution of food, and is likely to break the budgeted amount by almost 60%.
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The good thing of FY2021-22 has been that revenue collections have been buoyant. The high petrol excise provided the cushion for keeping the fiscal deficit with the 6.8% ballpark. And with the government’s spend on vaccination tailing off, there will be a large saving there. (The government seems to have made it clear it isn’t going to give “precautionary shots” to the bulk of the population as Indian health experts, as yet unknown and unseen, don’t think it is necessary, though the lack of desire to spend more on vaccines seems to be the real reason.)
So, besides election goodies, the general consensus seems to be that the government will carry on its approach to budgets focusing on capital expenditure, privatisation and targeted populist social spending. It may not seek to reduce the fiscal deficit too quickly, but it is unlikely to open the gates of tax cuts and raised exemptions for the few taxpayers that there are.
In fact, post the assembly elections, there is a very good argument for the government to reconsider its excise cut on petrol/diesel made in November, as it is a more equitable tax; even those who avoid paying all other taxes need to run their vehicles. While this may raise inflation, the government could consider cutting IT rates, especially doing away with cesses, if it resorts to this. This would also buy it time to rationalize, simplify the GST regime — it desperately needs to be done — so that GST actually works as it was supposed to. Similarly, the Finance Minister could an add incentive to get tax payers to move to the no-exemption tax system it brought in last year.