Union Budget 2018-19: Income Tax rates may change little 

With the entire gamut of Indirect Taxes moving to the GST council, the focus in the upcoming budget would shift towards Direct Taxes which still fall under the direct control of the Finance Minister. How he would tweak rates on Direct Taxes (Income Tax, Corporate Tax), especially in a pre-general election year, is certainly of prime interest to the 40 million people (about 4 crores individuals and corporations) who pay direct taxes that raise about 50 per cent of government’s taxation revenue. Of these 40 million, the ones falling under 10 or 20 per cent tax bracket, are electorally important too, so some kind of populist impulse can certainly be expected in the Budget, feels many experts.

Does the Finance Minister have the room for giving relief or would he care little about fiscal deficit in a pre-election year? There are indications that government might increase its spending to alleviate farm distress and spend more on rural health. To keep its expenditure in control, it may cut budgetary support to Railways or raise more money from disinvestments. With receipts under GST falling short of expectations, any relief on the Income and Corporate Tax fronts could be fiscally suicidal though it might boost the government’s electoral prospects. GST collections have been falling by over 20 per cent since August 2017 when the country first embraced it. Taxation has been an important fiscal tool available to the government to raise revenue for itself. “Since GST regime is still stabilising, collections under Direct Taxes assume importance in this year’s Budget” says Pratik Jain, Leader (Indirect Tax) PwC India. As GST is expected to take one more year to stabilise, Jain doesn’t think it would be a populist Budget because government is very clear about the fiscal deficit. “I don’t think that there would be a substantial giveaway in this Budget,” he says.

Agrees Phani Sekhar, fund manager with Karvi Capital. With no revenue predictability on the GST front, not much can be given away.

“With much of the Indirect Taxes slipping out of the Finance Minister’s direct control, his ability to experiment with the leftover (i.e Direct Taxes) gets limited.” And therefore “expecting much relief on Income and Corporate Taxes would be unrealistic,” adds Sekhar. Minor tinkering, however, can benefit taxpayers, especially those falling under 10 or 20 per cent tax bracket.

Though bulk of the Indirect Taxes would now be decided by GST council, the taxes on petrol and petroleum products (part of indirect taxes) still fall under the Finance minister’s control. About INR three lakh crore of taxes are collected by the Centre on account of taxes on hydrocarbons. Many experts believe that taxes on petroleum products might take longer to be fully transferred to GST council. Given its large scale, such taxes may never get transferred to the council, say some of them. Jain, however, foresees the possibility of taxes on cleaner fuels to come under GST. What could also happen is that GST would mature into a single rate tax structure with fewer items in 28 per cent bracket. It is unfortunate, feels that “GST would be¬come an important trigger to widen India’s Direct Tax base.” With millions of new dealers getting registered under GST regime it would now be easier to trail many more people who should be paying taxes and had been avoiding it.

Would bringing back Inheritance Tax help? The Inheritance Tax is imposed on recipient (son or daugh¬ter) of family wealth. Basi¬cally, a tax on wealthy peo¬ple, the rationale behind Inheritance Tax is that such transfer of wealth is deemed ‘unearned’ by the recipient and therefore taxed. Such a tax was abol¬ished in India in early 1980s as administrative expenses of collecting such a tax was far more than the amount of tax collected.

But as more and more companies are moving towards automation (as a tool to raise productivi¬ty), more wealth is getting concentrated in few hands. “This is posing a dilemma before governments all over and one would not be surprised that government puts a threshhold (Rs 10 crore) beyond which Inher¬itance Tax is imposed” says Deepak Kapoor.

The Budget would also be watched for Dividend Distribution Tax (DDT) which is also targeted at wealthy people earn¬ing most of their income through dividends. Ka¬poor denies that rich peo¬ple earning most of their income are lightly taxed. “Besides the Dividend Dis¬tribution Tax on dividends there is an additional tax of 10 per cent on those earning dividends above 10 lakh,” he points out.

With one of the rating agencies upgrading India, the expectation is that the government would try to retain that by adhering to the fiscal path. The gov¬ernment’s recent decision to borrow Rs 50,000 crore raised the bond yields, sensing which the gov¬ernment hurriedly made an announcement to cut its borrowing to Rs 20000 crore. Any deviation from the fiscal path would be negatively perceived by markets. “And the govern¬ment knows the risk very well, ” says Sekhar.