Key Expectations from the Union Budget 2021

union budget 1 Key Expectations from the Union Budget 2021

As India prepares for what could be one of the most critical budgets in recent times on 01 February 2021, the big question is what could be the key expectations. What do the various stakeholders expect Nirmala Sitharaman to delivery when rises to present the Union Budget 2021 on 01 February. Here is a quick take. First the background!

Soft budget needed in tough times

The economic situation remains grim if you look at the growth. After contracting for the first two quarters of the current fiscal, Indian economy is expected to contract by nearly 7.7% for the full fiscal year 2020-21. The next fiscal will be year of sharp growth, but we will have to wait for that. The bigger priority today is two-fold. Firstly, the budget needs to address the revenue shortfall which is expected to be to the tune of Rs.5 trillion to Rs.6 trillion if the shortfalls in tax collections and disinvestments are factored. That needs to be filled up.

Secondly, there is the bigger challenge of reviving growth. That needs an effort from the supply side in the form of industrial incentives, export growth strategies and monetary accommodation. At the same time, it also needs efforts from the demand side in the sense that the budget has to put more money in the hands of people and also encourage them to spend. Here is what the budget can do.

Put more money in the hands of people

The best way to put more money is to reduce the rates of personal income tax rates. That has to be done notwithstanding the fiscal constraints. Ideally, this budget calls for a quantum shift in slabs. For example, the incomes up to Rs.5 lakhs can be made tax-free and get rid of the rebate concept. At the same time, the tax rates of tax for the people in the bracket of Rs.5 lakhs to Rs.10 lakhs from 20% to 10% will be a big boost to consumption. This is the segment that is most inclined to spend any incremental money.

union budget1 Key Expectations from the Union Budget 2021

But, people must also be encouraged to save for the future

You can have a budget that only encourages you to spend. Vast swathes of the middle class have compromised their long term security by withdrawing from their provident funds in tough times. One way is to offer special incentives to individuals to replenish their funds in

their PF accounts with the government contributing part of it. Also, the limits of Rs.1.50 lakhs for Section 80C and Rs.2 lakhs for Section 24 on interest on home loans are grossly inadequate. The budget must look to enhance Section 80C to Rs.3 lakhs and Section 24 to Rs.5 lakhs. This will make these exemptions more in tune with the current savings patterns, income levels and property costs.

Time to tax businesses at a more reasonable rate

The concept of presumptive taxes on small businesses and individual professionals is a great idea and must be extended to other businesses also. In most cases, the tax rates are just too steep. For example, MSMEs consisting of partnership firms and LLPs pay tax at 30% and also pay surcharge and education cess on top of that. While the government has cut tax rates for corporates to 22%, such a benefit has not been extended to partnerships and LLPs. As a result, other business enterprises still pay high tax at 30%. To empower MSMEs and put them at par with corporates, the government must look at a concessional tax rate of around 15% for these smaller players.

Incentives for MSMEs to scale up

This is the time to think big about MSMEs, especially when it comes to scaling up their businesses. Ideally, the government could assist capital intensive MSMEs for their investments in plant and machinery. Perhaps, such investments could be incentivized through a deduction under section 32AC. Remember, this section was introduced in 2013 Budget to encourage investment in new plant and machinery, but the base limit was set at Rs.25 crore. To encourage MSMEs to invest, this limit should be drastically reduced

Time to cut GST rates to more rational levels

Many sectors end up paying inordinately high rates of GST, which adds to the costs of consumers. One way out is to cut the rates of GST in a phased manner. For example, the auto sector is looking forward to a rate cut in automobiles from 28% to 18%. Putting autos at par with cigarettes does not really make sense. More important are selective exemptions, including exemption for health care segment and health insurance from GST. The budget also wants that all 18% items may be reduced to 12% for a year and items of mass consumption may be pegged at GST rates between 0% and 5%.

At the end of the day, we must not forget that the government is running a tight ship but has to make a choice to boost consumption. Probably, this is another year, the government ought to forget about the fiscal deficit concerns and just focus on growth.

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