Budget 2018: Revenue shortfall put corporate tax cuts on hold

Modi pledged in 2015 to bring down corporate taxes over four years, but businesses are still waiting for a roadmap on how that will happen

Budget 2018

Businesses waiting for Indian Prime Minister Narendra Modi to follow through on a pledge to cut corporate taxes may need to wait a bit longer.

In his last full budget before 2019 elections, Modi is facing a revenue squeeze that may make it difficult to deliver on a promise to lower the basic corporate tax rate over time to 25 percent from 30 percent. It’s a catch-22 situation for the premier, who is also trying to lure foreign investors at a time when the US, UK and other countries are lowering business taxes.

Here’s a look at Modi’s challenge ahead of the government’s budget 2018 on Thursday.

Why Cut?

Modi pledged in 2015 to bring down corporate taxes over four years, but businesses are still waiting for a roadmap on how that will happen. It’s part of his mission to improve India’s investment climate: he is also reducing red-tape, spurring the liquidation of assets to speed-up the recovery of bad loans, and introduced a national sales tax last year to cut down business costs. India is ranked 119 out of 190 countries when it comes to ease of paying taxes, according to the World Bank’s Doing Business index.

While those reforms have helped India win a credit rating upgrade and record foreign direct inflows last year, Modi needs to keep investment going to help support an economy that’s set to expand at its slowest pace in four years.

Tax competition around the world is heating up. The US lowered corporate taxes by 14 percentage points to 21 percent, with companies like Apple Inc, Wal-Mart Stores Inc and JPMorgan Chase & Co announcing plans to raise investment, hiring or wages.

“The US has made corporate tax rates competitive and India needs to respond,” said Jayesh Sanghvi, a tax partner at EY in Hyderabad. If it doesn’t, companies will examine arbitrage opportunities given the 10-15 percentage point difference, he said.

After reducing the rate last year to 25 percent for small companies with a turnover of up to 500 million rupees ($7.9 million), businesses are expecting Finance Minister Arun Jaitley to move again this week. Half of the 120 professionals surveyed by Deloitte expect the rate to be cut to 25 percent for all companies. Rakesh Nangia, head of tax advisory firm Nangia & Co, warned of a “flight of capital” if tax rates aren’t reduced.

Can India Afford It?

Modi is in a fiscal bind. Revenue collection remains under pressure following the chaotic roll-out of a national sales tax, and with an eye on next year’s election, his spending priorities may turn to the distressed rural sector, putting pressure on the budget deficit.

The government signaled on Monday it may slow the pace of fiscal consolidation after pledging to narrow the budget gap to 3 percent of gross domestic product in the year beginning April 1 from an estimated 3.2 percent this year. Chief Economic Adviser Arvind Subramanian told lawmakers that setting “overly ambitious targets” may undermine the credibility of fiscal policy.

Abhishek Gupta, a Mumbai-based analyst with Bloomberg Economics, expects the budget deficit to come in at 3.4 percent of GDP this year. The median estimate in a Bloomberg survey of 18 economists is for 3.5 percent this year and 3.2 percent next year.

Political considerations may also prevent Modi from reducing corporate taxes now, said Shailesh Kumar, a senior analyst at Eurasia Group in Washington.

“In addition to concerns that a reduction will further widen the deficit, a move by Modi to cut corporate rates ahead of next year’s election would expose him to opposition criticism that he is a crony capitalist who only wants to help friends in the business sector,” he said.

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No tax relief, spending spree due in last budget before elections: Poll

The median forecast from over 40 economists polled Jan 24-29 was for India’s government to borrow 3.2 percent of gross domestic product (GDP) in fiscal 2018-19.

Arun Jaitley, Budget

India is expected to unveil only modest stimulus at this week’s budget, a Reuters poll of analysts showed, despite it being the last before the next election, with government spending likely limited by longer-term efforts to trim the fiscal deficit.

Fiscal consolidation was first proposed by Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) government in its maiden budget in fiscal 2014/15, aiming to break a long line of Indian governments that preferred to borrow and spend.

But in following budgets, the timeframe for reaching a reduction to a 3.0 percent fiscal deficit target was pushed back.

The latest Reuters poll shows the government is expected to delay the timeframe for hitting that target by another year, for the third year in a row, due to setbacks in the economic outlook.

The median forecast from over 40 economists polled Jan 24-29 was for India’s government to borrow 3.2 percent of gross domestic product (GDP) in fiscal 2018-19.

“As the current government will present its last full-year budget before the 2019 general elections, many in the market expect a heavier dose of populism. However, the government has limited financial resources to propose any targeted scheme for the poor,” wrote Gautam Duggad, head of research at Motilal Oswal Securities, in a research note.

“We also do not expect much relief on the tax front, except some reduction in the corporate tax rate for medium-sized companies.”

The government’s own economic survey presented to parliament on Monday suggested that pushing further out the fiscal deficit target would give the economy some momentum.

For the current fiscal year, the target is 3.2 percent and the government is unlikely to meet that as it has already overshot its full-year goal. With less than one quarter of the fiscal year left, the government is unlikely to meet its deficit target.

Three-quarters of the 40 economists polled, based in India, Singapore and Europe, said that fiscal consolidation is likely to be Finance Minister Arun Jaitley’s dominant theme when he unveils his budget on Thursday.

Just under 10 percent of survey respondents said he will focus on boosting subsidies while about 18 percent expect a significant increase in borrowing and spending.

Among those expecting a more populist budget are economists that say the government will announce new subsidies, such as loan waivers for farmers, an increase in healthcare spending, a cut to taxes on fuel and a ramp up in rural housing schemes.

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Economic Survey sounds a note of caution on the high equity valuations

Domestic equities have risen sharply on expectations of strong corporate earnings

Eco Survey 2018: Real estate, construction to create 15-mn jobs by 2022

The Economic Survey 2018 sounded a note of caution on the high equity valuations and hasn’t ruled out a possibility of a correction. After a sharp 23 per cent rally this financial year, the benchmark Sensex is trading at 27 times its trailing 12-month earnings. The broader-market BSE Midcap and Smallcap indices, which have outperformed the benchmark in FY18, are trading at even higher valuations of 47 and 105 times, respectively.

“Sustaining these valuations will require future growth in the economy and earnings in line with current expectations, and require the portfolio re-allocation to be semi-permanent. Otherwise, the possibility of a correction in them cannot be ruled out,” the Survey said.

Domestic equities have risen sharply on expectations of strong corporate earnings. However, the earnings growth has been elusive so far, only to belie analysts’ expectations.

“Expectations of earnings growth are much higher in India. Indeed, it was such expectations that lie at the origin of the stock market boom. In early 2016-17, signs emerged that the long slide in the corporate profits-to-GDP ratio might finally be coming to an end. Investors reacted to this news with alacrity, bidding up share prices in anticipation of a recovery they hoped lay just ahead. Accordingly, the ratio of prices-to-current earnings rose sharply,” said the report.

The lackluster earnings trajectory has been largely on account of policy disruptions such as implementation of the goods and services tax (GST) and demonetisation. The Street is expecting a turnaround in earnings.

“There is exuberance in broader market valuations, largely on account of earnings revival expectations. Therefore, if earnings disappoint or if there is a drop in incremental flows, we could see a sharp correction,” said Gautam Duggad, head of research, Motilal Oswal Institutional Equities. What has kept stock prices afloat despite lack of earnings momentum, is the availability of abundant liquidity — both globally and domestically.

According to the Survey, low interest rates, globally have resulted in a fall in the equity risk premium (ERP). Low ERPs have led to a shift in portfolio allocations from debt to equity.

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Economic Survey 2018 may not shape Budget, but it is a treasure of insights

Since demonetisation, 10.1 mn new taxpayers have filed returns, versus an average of 6.2 mn in the prior 13 months

Economic survey, Arvind Subramanian, eco survey

The Economic Survey (ES) is not really a precursor to the Union Budget; that is, its projections and recommendations might not shape the Budget. However, it has become a treasure trove of insights about the economy, based on data sets not generally available to those outside the government. The themes it explores are novel, relevant and well researched. This year’s document is no different.The analysis of trends under the goods and services tax (GST) is the most important and timely. Given the prevailing confusion outside (and even inside) the government, it is comforting to see the 50 per cent improvement in number of indirect tax assessees. Now, 9.8 million enterprises are registered: Though only 13 per cent of total non-agricultural enterprises in India, they account for 93 per cent of revenues. Less than 10 per cent of GST filers (revenues more than Rs 50 million) contribute to 85 per cent of GST collected.Interestingly, the GST tax base (excluding exports), at around Rs 70 trillion, is close to that estimated by the Revenue Neutral Rate (RNR) committee, which had recommended a GST rate of 15 per cent. The first few months of data suggests a weighted average rate of 15.6 per cent, implying GST is already helping tax collections, and should comfort those worried about near-term fiscal health.

In fact, it estimates revenue from GST in FY18 should be 12 per cent higher than indirect tax growth last year.The ES uses GST data for some other useful insights as well: Inter-state trade is as high as 60 per cent of GDP (last year’s ES used other metrics to arrive at 54 per cent). That Maharashtra, Gujarat, Haryana and Tamil Nadu are large “net exporter” states is not surprising, but 26 per cent of Maharashtra’s GDP and 20 per cent of Gujarat’s being net exports is remarkable. Similarly, it finds GST registered enterprises employ 51 per cent of the non-agricultural workforce, and combining this data with pension fund data could be useful in assessing and then expanding the breadth of India’s social security net.

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Economic Survey 2018: Indians go on producing children till they have sons

There may be a meta-preference manifesting itself in fertility-stopping rules, contingent on the sex of the last child, which notionally creates ‘unwanted’ girls, estimated at 21 mn, the Survey says

Economic Survey 2018

The Economic Survey 2017-18 reveals that Indian parents, still keen to have more and more male children, continue producing “until they have the desired number of sons”. The survey calls this phenomenon the son meta-preference, which involves parents adopting “fertility-stopping rules”, or having children until the desired number of sons are born.

The country’s sex ratio, skewed in favour of males, has led to the identification of “missing” women. But there may be a meta-preference manifesting itself in fertility-stopping rules, contingent on the sex of the last child, which notionally creates “unwanted” girls, estimated at about 21 million, the Survey adds. “Consigning these odious categories to history soon should be society’s objective,” notes the Survey.

mong the startling facts revealed by the Survey is that the sex ratio of last birth (females per 100 births) has come down by 40 basis points from 39.4 per cent in 2005-06 to 39 per cent in 2015-16. The Survey suggests that women making their own income has seen no change in 10 years between 2005-06 and 20015-16. Only 13 per cent more women are getting educated – up from 59.4 per cent 10 years ago, to 72.5 per cent now.

Another startling observation in the Survey is that fewer women are now involved in decisions related to contraception.

Also noted is the fact that women’s employment has declined over time. “Another such area is in the use of female contraception: nearly 47 per cent of women do not use any contraception, and of those who do, less than a third use female-controlled reversible contraception. These outcomes can be disempowering, especially if they are the consequence of restrictions on reproductive agency”, noted the survey.

Poonam Mutreja from the Population Foundation of India (PFI), It is no surprise given that we are still focussing on sterilisation. Supply of care healthcare to provide sterilisation is dismal. It is ridiculous that we have not used 40 per cent of the budget for family planning remains unutilised. Making contraceptives available is very important and not yet available fully.

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Some Populist Steps Expected for Various Sectors in Budget 2018

Although keeping in mind the fiscal compulsions and recent statements made by FM Arun Jaitley and also PM Narendra Modi himself it is given that the Budget 2018-19 is not going to be overly populist

Arun Jaitley

The Budget 2018-19 will be the last full Budget before the Lok Sabha elections in 2019. Also before the said elections there will be assembly election in eight states in 2018 namely Meghalaya, Tripura, Nagaland, Karnataka, Mizoram, Chhattisgarh, Madhya Pradesh and Rajasthan. As a result both Political compulsions and opportunism is expected to play out in the Budget 2018-19. Although keeping in mind the fiscal compulsions and recent statements made by Finance Minister Arun Jaitley and also Prime Minister Narendra Modi himself it is given that the Budget 2018-19 is not going to be overly populist in nature. During a recent media interaction Prime Minister Narendra Modi has stated that the common man doesn’t want freebies and sops and that his government is committed to reforms, fiscal targets and prudence. Elsewhere he has also stated that he isn’t sure whether corporate India will like him after the Budget 2018 or not. Having said that the results of the recent Gujarat assembly elections indicated electoral losses for the government due to rural distress; thus to address the said issue and to reward people for shouldering the pain of demonetization and other reforms some populistic measures are expected in the Budget 2018. Some expected measures are listed below.

Cut in Personal and Corporate Tax Rates – It is widely expected that there would a revision in the tax slabs and an increase of exemption limit for personal income tax in the Budget 2018. Tax exemption limit which is currently 2.5 Lakhs is all but expected to be made 3 Lakhs. Industry leaders from various sectors and bodies such as CII and FICCI have also recommended that said step to the FM to increase disposable income of the middle class to fuel demand and growth. Other that raising the tax exemption limit existing tax slabs may also be tweaked to provide relief to tax payers. Corporate India is also optimistic that the corporate tax rate may see a cut from the current 30% to 25%. But given the recent statements by the FM and fiscal challenges the said move may or may not be made by the government in the Budget 2018. Some corporates may receive some tax relief and incentives though.

Other Tax Sops – Some other tax sops for individual tax payers are also expected in the Budget 2018. At present a maximum tax benefits of 1.5 Lakhs is allowed under Section 80C on various tax saving schemes such as PPF, EPF, ELSS, NSCs, life insurance and more. This said is also expected to be raised by 50000 so that individuals can avail deduction of a maximum of 2 Lakh rupees. An increase in the limit of deduction for medical insurance and health checkups under Section 80D is also expected. Additional tax benefits on insurance policies and investments in to mutual funds has also been desired by the insurance and finance sector but will the FM heed to their demands is something we have to wait and see.

Pensioners and Senior Citizens – Pensioners and senior citizens have emerged as a big block of voters and it is quite likely that the government will try and woo them with sops. In the Budget 2018 the Government is expected to make retirement benefits as tax free. Higher tax exemption for pensioners and senior citizens is also on the cards in the Budget 2018. It is believed that the government is seriously considering a proposal made by MP Shashi Tharoor that pension up to Rs 5 Lakhs should be made tax free. In the Budget 2018 there also may be sops for early retirees between the age of 55 and 60. Easier tax compliance through separate process and grievance redressal system is also believed to be under review.

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Ways to Stimulate Employment Generation in Budget 2018

Employment generation is one of the key challenges before the government in the Budget 2018-19.

jobs, employment, work

Employment generation is one of the key challenges before the government in the Budget 2018-19. Modi Government had promised 1crore jobs every year for the youth but 3 years in to power what we have seen is a marginal rise in the unemployment rate. No wonder that the government came under severe criticism from all quarters for failing to create jobs. Unemployment rate of 5 – 6.5% for a young country like India where 65% of the population is below the age of 35 is alarming. Also now with advent of automation and AI, many sectors such as Information Technology and manufacturing may in fact see job losses. Over the last decade the GDP growth of the country has mostly remained a jobless one. Right for the UPA era to current times there has been a number of steps that the successive governments have taken such as MNREGA and Mudra Yojana to address the issue but the impact of the same has remained modest as best. Now with disruptive reforms such as demonetization and GST the situation has gone from bad to worse and urgent steps in the Budget 2018 are required to address the issue of employment generation. Some of the bold steps and reforms that the government can contemplate upon in Budget 2018 are mentioned below.

Step to Revive Private Investment – Along with increase in Public investment, the government needs to revive private investment too and steps for the same will have to be taken in the Budget 2018.Tax sops are being touted as one of the ways to improve sentiments and thus improve private investment in various sectors. It is believed that the government is mulling an investment allowance in terms of tax benefits to already existing businesses for further investment and expansion of their manufacturing plants and capacity. The government believes that it will help boost employment and increase capacity. This coupled with more money in the pocket of middle class through tax cuts will boost demand and provide the required impetus to the economy. Other steps that the government can take in the Budget 2018 are to ensure long term policy consistency, cutting of red tape and further improvement in ease of doing business and climate for investment.

National Employment Policy – It is expected that the government may announce India’s first National Employment Policy (NEP) in the Budget 2018. The policy will lay down a roadmap and steps that the government intends to take for employment generation through various economic and labour policies and reforms. In the said policy the government is expected to incentivize job creation by corporate and provide the required support structure for small and medium sized enterprises which are real job creators in the country. The NEP will also lay down guidelines for employment and protection of employees through addressing issues such as guarantee of minimum wage and social security. The government believes that National Employment Policy (NEP) will be a game changer as far as employment in the informal sector is concerned. Niti Aayog has stated that substantive reforms and changes are required in the Indian job market which is currently dominated by low-wage jobs. It further stated that these issues and other tricky issue such as that of labour reforms can be addressed through a well-planned NEP.

Stimulus for Employment Intrinsic Sectors – Many sectors such as manufacturing, agriculture and others are employment driven and thus experts believe that the FM should have a special focus on the said sectors in the Budget 2018. Tax rate cuts and sops are expected for these sectors in the Budget 2018. Bulk of India’s workforce is involved in the informal sector, the government would want to reverse this trend and increase employment in the formal sector. Banking sector especially Public Sector Banks (PSBs) have been a major employment generator in the past with banking reforms and proper tweaks the sector has the potential to be a major employer once again. New age sectors such as ecommerce and app based taxi services and more have been in the forefront of job creation in the recent years and the trend is likely to continue. Thus the said sectors also expect a special treatment from the FM in the Budget 2018.

Policy for Ease of Business – Experts believe to encourage employment generation the Government’s reform agenda should continue and in fact must gather pace. Clear cut long term policy formation, simplification of tax and other laws and codes, easier processes to start or shut down businesses such as single window clearance and more can go a long way in improving sentiments thus will have a positive impact of employment generation. Another sticky issue is that of impending labour reforms that will enable contractual hiring and firing of employees. Experts believe that this will lead to increased employment generation but will thin the social security and job security net for the employees. Thus a balanced approached is required, the government should work will various trade unions and industries to chalk out a middle path.

Skill Development and Entrepreneurship – The government is likely to continue and in fact scale up its flagship programs such as Skill India and others to improve employability of the existing workforce. As per World Bank more than 30% of India’s population between the age group of 15 and 29 years are NEETs (Not in education, employment or training). Add to that in the past only around 12% of more than 550,000 workers trained by the National Skill Development Corporation have landed a job. To address the said issues the government needs to generate 10 to 12 million jobs a year and also further improve employability. Although government actions such as the MUDRA Yojana and others have shown that it wants to encourage entrepreneurship but much is still required to be done on the said front too. Thus further steps to boost startups and encourage scale ups should also be accommodated in the Budget 2018.

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