Budget 2017—SBI report: Expect sweeping recast of direct taxes

Saying that the Indian economy is facing tough times due to the demonetisation decision, a State Bank of India report expects the Narendra Modi government to make a "sweeping recast of direct taxes" in the Union Budget to give a boost to the economy.

"The Indian economy is facing tough times today. Demonetisation has changed the entire gamut of the economy," says SBI's research report Ecowrap in a paper titled 'Agenda for Union Budget 2017-18'. SBI had earlier cut the GDP growth rate for the current financial year to 6.7% due to demonetisation, from the initial estimate of 7.6%.

To tide over the setback to the economy due to demonetisation, the SBI report expects Finance Minister Arun Jaitley to make the following sweeping changes in direct taxes in the forthcoming Union Budget:

• An increase in personal income tax exemption limit from ₹2.5 lakh to ₹3 lakh. This will impact 75 lakh taxpayers
• An increase in Section 80C exemption limit from the current ₹1.5 lakh to ₹2 lakh.
• Interest exemption on housing loan from ₹2 lakh to ₹3 lakh
• Reducing—or even abolishing—the lock-in period for bank fixed deposits from 5 years to 3 years for availing tax exemption.

The above concessions would result in a revenue forego of around ₹35,300 crore. However, it expects a tax collection under Income Disclosure Scheme to be around ₹50,000 crore and cancelled liabilities from the RBI to be around ₹75,000 crore —that is, the demonetised currencies that apparently haven't come back to the banks. "Hence, the Government still have a sizeable revenue surplus even after such giveaways," says the report by SBI Economic Research, headed by its Chief Economic Adviser Soumya Kanti Ghosh.

The report points out that the fiscal deficit target of 3.9% has now gone up to 4.3% of GDP for 2016-17. However, it doesn't want the Government to get "straitjacketed in the fiscal consolidation agenda" so as to compromise development goals.

The challenges for the budget this year, it concedes, are more formidable than they were in the previous year. Saying that there is no substitute to investment-led growth as opposed to consumption led, the SBI research report wants a more prudent approach. This could be by "selecting two to three high potential sectors for fiscal stimulus," agriculture being the most promising followed by small and medium scale enterprises (SMEs).

The report further says that the unorganised sector—which accounts for 36% of GDP—has been impacted by demonetisation and normalisation for the segment would take time. The organised segment of the industry too is still under debt. Besides, the rural sector which is the primary source of demand has faced negative income shock over the past two years. To add to this, high GDP growth has not translated into employment with latest unemployment figures high, notably in urban centers.