As the countdown begins for Budget 2016, expectations soar from Modi government. Will the government dole out tax sops to cap its waning popularity or will it set the foundation for a progressive tax structure and stable growth? While it may be hard to tell which path the government will take, here are five factors that will influence its budget plan.
1. Falling crude prices – Falling crude oil prices is good news for the Indian economy. It helps reduce our import bill and allows better fiscal management. With less pressure on fiscal deficit, it reduces subsidy on LPG and kerosene. The government could redirect this benefit to growth activities in the near term. Or could use this benefit by giving away some tax exemptions while still keeping its fiscal goals in check.
Minimum exemption limit of Rs 2,50,000 and Section 80C limit of Rs 1,50,000 have not been revised since financial year 2014-15. While raising the exemption limit would mean fewer taxpayers filing their returns, enhancing section 80C limit comes with twin benefits.
Allowing more tax saves and garnering funds to invest in growth. The government could also consider adding a new deduction for investment in infrastructure bonds.
However, a steady fall over a longer term may spell trouble for global economies, and India is not immune to global challenges.
2. State elections – While the government enjoys majority in lok sabha, it has had a hard time getting its way past the upper house. Needless to say, state politics have a significant role to play in centre’s overall plan. West Bengal, Tamil Nadu, Kerala and Assam are some of the states that go to elections this year.
These states make up 20% of the total rajya sabha seats. It is expected that some of these states may find a mention in the budget speech this year. Uttar Pradesh is due for elections in early 2017 and is the largest contributor of seats to both the lok sabha and rajya sabha; this is bound to give the state a special place in this and next year’s budget.
3. Fiscal discipline – Below target tax collections have been the bane of sound fiscal discipline. But if the main cause of deficit is rise in government spending on infrastructure projects, it may be not be such a bad thing after all. In fact, some economists have held a lax government spending could spell trouble for overall growth.
At the same time it is true that a higher deficit could lead to higher taxes and a poor economic impact. The government needs to find the right balance and make sure it is investing in growth at the same time allowing for conducive tax environment.
Business tax structure – In the last budget our FM vowed to streamline our business taxes. Take away certain exemptions and reduce tax rates. Therefore, in this year he will set the roadmap for these changes, hopefully giving way to make India’s tax structure world class.
5. Start-up India – Indian start-ups have made significant impact both locally and outside. The current regime has recognised that Indian start-ups have been attracting capital & talent. Which has the potential to funnel into deep economic impact.
Several announcements have been made at the start up India event and later by the RBI. The budget will pave the way for inclusion of these announcements in to the income tax act. Doing this will spruce government’s growth agenda and appease the start-up community.
The government still has time on its side to deliver on its ache din promise.