Indian government laying the groundwork for upcoming Budget

The Indian government is outlining its economic plans for long-term growth ahead of the Union Budget 2023, which will take place on 1 February.

Among the measures being considered are rises in customs duty, with the according to an Economic Times (ET) report, with the government reportedly preparing a list of over 35 items for a possible hike in customs duty.

Quoting a government official, the ET report said the list includes private jets, helicopters, high-end electronic items, plastic goods, jewellery, high-gloss paper and vitamins. The move to raise customs duty is designed to cut imports and boost domestic manufacturing.

In December 2022, the commerce and industry ministry asked other ministries to identify non-essential items for a possible import duty hike. Discouraging imports through import duty hikes could help India bring down its current account deficit, which rose to 4.4% in the second quarter of FY22.

DBS Bank’s chief economist Taimur Baig told Reuters that the government will target cutting the budget deficit ahead of the upcoming general election in 2024 without also focusing on long-term economic growth. “We expect the budget to chart a path towards some fiscal consolidation,” he added.

 

Top advisor recommends cutting tax exemption

A leading government advisor is recommending the government removes exemptions on both personal income tax and corporate taxes in the Union Budget 2023.

Bibek Debroy, Chairman of India’s Economic Advisory Council to the Prime Minister, said such a move in the upcoming Union Budget would incentivise taxpayers to move towards an exemption-less direct tax system, “which would increase revenue, broaden the tax base and reduce compliance cost and litigation”.

“I think the big agenda on the direct tax side which is still pending is the removal of exemptions, both on the personal income tax side and the corporate side,” Debroy said in an interview to Moneycontrol.

“What one needs to do, and I hope the budget does that, which is to incentivise the movement from a system with exemptions to an exemption-less system,” he added.

While India is not going to be in a position to move to a system that has no exemptions, the country should look to move to exemption-free regime in the medium term, according to Debroy.

He is not the only senior figure urging India’s Finance Minister Nirmala Sitharaman to tweak the direct tax system.

Businessmen including Sanjiv Goenka, chairman of RPSG Group, B.V.N. Rao, chairman of GMR Group and Naveen Munjal, managing director of Hero Electric Vehicles, urged the Finance Minister to adopt measures to rationalize personal tax rates, especially at the lower end of the income spectrum, and focus on job creation at a summit meeting in November 2022.

In fiscal year 2020-21, the government introduced an exemption-free personal income tax band with lower tax rates. However, taxpayers had the option of staying with the older tax regime, under which they were still entitled to exemptions. Companies also have the option for paying tax at a lower tax rates as long as they eschew the available exemptions.

Bibek Debroy added that “we must be willing to pay higher taxes or we must be willing to settle for reduced delivery of public goods and services”.

The country as a whole is losing revenue on the indirect tax front as the average GST rate is lower than so-called revenue neutral rate, Debroy said. However, tax collections have been robust this financial year, in line with the economic recovery.

“Tax evasion is illegal and indeed the scrutiny that has happened both on the on direct tax as well as on the GST side had led to a reduction in tax evasion. I am not suggesting for a minute that it has been eliminated but it has definitely come down,” Debroy said.