Over a month has passed since Prime Minister Narendra Modi declared that Rs 500 and Rs 1,000 currency notes would not be legal tender from November 9. What has followed is much misery and disruption on the one hand and optimism and enthusiasm on the other, as the nation keeps adjusting to the “short-term pain” of having limited access to their money to the hopes of a better tomorrow in the long-term.
Against this backdrop, the Union Budget that is expected on February 1, 2017 will be among the most anticipated economic events under the Bharatiya Janata Party government since it came to power in 2014. This is also when the BJP is likely to announce major concessions as the Budget will be presented shortly before elections in Uttar Pradesh.
The sudden demonetisation of high-currency notes has resulted in major disruption in the economy at least in the short term. Amid a severe cash crunch, trade, industry and the informal sector have suffered. Workers have been laid off, farmers have been struggling to buy and sow crops for the winter season and migrant labourers have been forced to go home owing to the shortage of work in cities. In this environment, expectations are running high that the government will compensate the country for the hardship they have endured because of demonetisation. And the BJP is working to build up these expectations.
For instance, this report in the New Indian Express quotes a BJP official saying off the record that “there is a clear consensus within the government that the time to reward the middle class has arrived and that tax relief has to be substantial”.
On the record too, ministers are hinting at a tax-friendly budget. “There is a likelihood of reduction in direct taxes next financial year,” Minister of State for Finance Arjun Ram Meghwal was quoted as saying. “That will be a part of ‘ease of doing business’. This will be deliberated on in pre-Budget consultations.”
Power Minister, Piyush Goyal, also gave good tidings for the Budget, saying that citizens should “expect good things on February 1”
What makes for a good budget can be debated over many columns but this brings to mind the “dream budget” under Finance Minister P Chidambaram in 1997, which, among other things, lowered income tax rates significantly. Chidambaram also abolished the surcharge on corporate tax, reduced income tax rate on corporates, removed dividend tax in the hands of shareholders and eased foreign investment in India.
So, what can we realistically expect from next year’s budget, given the current economic environment?
- Reduction in income tax: The government could look at one of several ways to ease income tax. The first would be to lower income tax rates (currently 10% for annual incomes above Rs 2.5 lakhs, 20% to incomes of Rs 5 lakh and above and 30% for Rs 10 lakh and above). It could also raise the taxable income from Rs 2,50,000 to a considerably higher amount. Further, income tax could be made simpler by removing the many deductions and reducing the income tax rates. However, a token tinkering with tax slabs and rates, will be a big disappointment.
- Big relief measures for the poor: Though its initially stated target was to crack down on the big fish hoarding black money, one month on, it is clear that demonetisation has affected the poor more than it has the salaried class. Aware of this, Prime Minister Narendra Modi last month announced a Pradhan Mantri Garib Kalyan Yojana, wherein those with large amounts of unaccounted-for wealth can declare it and pay a 50% penalty on it, provided they also deposit 25% of the amount for four years, without interest, under the scheme. Those who do not opt for the scheme will be taxed at about 85%.
If Modi keeps up with this trend, a huge increase in relief for the poor could be a central feature of the Budget. This could take the form of a big jump in social spending (either through new schemes or under existing centrally sponsored ones such as National Rural Employment Guarantee Scheme, or more direct benefit transfers of subsidies to the poor). Pro-poor measures, in fact, are likely to be the most anticipated part of Union Budget 2017-2018.
- Transparency in real estate and gold investment: While the impact of demonetisation on black money is yet to be seen, Modi has said he will continue to act against accounted-for wealth in India. Investments in real estate, gold and jewellery, which are commonly used to launder tax-evaded wealth, will be made more transparent. The Benami Transactions (Prohibition) Amendment Act 2016, which widened the scope of the legislation, came into effect from November 1 and Modi will look at more ways to go after black money invested in real estate and gold. Action on participatory notes (which allow overseas investors to invest in stock markets without getting registered, which can be abused to route illegal money into the stock market ) is also likely.
- Sops for digital transactions: The government could offer more incentives to digital transactions in keeping with its push towards a cashless economy. These include debit or credit cards transactions, netbanking, mobile wallets and the United Payment Interface app. Last week, Finance Minister Arun Jaitley announced discounts ranging from 0.75% to 10% on digital payments for products such as petrol, diesel, insurance, rail tickets, purchased from state-run companies.
Show me the money
So how much can demonetisation net the government? There are no clear estimates as of now, but here are some possible scenarios:
- Currency extinguished: RBI Governor Urijit Patel last week ruled out that there could be any special dividend for the government from demonetised cash that does not come back to the system. Prior to this, experts were anticipating a windfall gain in the form of currency notes (Rs 500 and Rs 1,000) that do not return to the RBI after demonetisation. They speculated that this would reduce the RBI’s liability, which could be transferred to the government as dividend.
- Pradhan Mantri Garib Kalyan Yojana : How much tax revenue the government accrues under this scheme will depend on how many people voluntarily declare black money and how much is unearthed by tax authorities. The first avenue should yield results by December 30, the last date to deposit old currency notes, but the second avenue would take longer to materialise as it could entail lengthy tax disputes. According to reports, the government could get Rs 1.3 lakh crores to Rs 1.5 lakh crores through this scheme. However, it is near-impossible to estimate the amount of tax that could be unearthed by income tax authorities.
- Income Declaration Scheme: Under this amnesty scheme for black-money holders, which ended on September 30, the government is estimated to have earned more than Rs 30,000 crore. Of this, a quarter was to be paid by September 30, another quarter by March 31, 2017, and the remaining by September 30, 2017 (or around Rs 15,000 crores).
Thus, the one-time windfall tax revenue for the 2017-’18 financial year can be pegged at Rs 90,000 crores (Rs 75,000 crores under Pradhan Mantri Garib Kalyan Yojana and Rs 15,000 crores from the Income Declaration Scheme). Any additional taxes and penalties from the sleuths at the Income Tax Department will only add to this. If we assume that the government will get at least Rs 30,000 crores through such raids, the windfall will come to about Rs 1,20,000 crores. This is the amount that the government could look at giving back to the public in Union Budget 2018.
Whether the demonetisation exercise will be worth the hardships, the shock to the economy and the loss of business in the long run, only time will tell. However, by early next year, the government will desperately need to soothe frayed nerves and reward citizens through some visible gains – without which, the pain of demonetisation will not seem worthwhile.
Anupam Gupta is a chartered accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.