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Why will the Budget 2018 be a Historic One? One key area that the Budget 2018 will focus on is the revival of stalled projects

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With a series of decisions in the first three years of its tenure, namely, Demonetization, GST and Aadhar, the government made its intention clear of crippling the parallel economy and bringing more businesses under the tax net. Increase in cashless activity, more people/ businesses under tax net and a smaller parallel economy, will all attack the black money creation and deployment. The next logical step would cement the initiatives in the right direction. This is why the 2018 budget will be historic in more ways than one.

Streamlining of Direct Tax Structure

We believe that the budget will focus on streamlining direct tax structure besides taking steps to bring vibrancy in the economic activities. There is an inevitable need of broadening the direct tax structure as India is probably the only country in the world with very small direct tax base compared to its population. India's tax to GDP ratio was 16.7% in 2016, 5.4% below that of comparable emerging countries. Developed economies do even better, United States - 25.4% and Japan - 30.3%. Direct tax to GDP ratio shows an even more dismal picture, dropping from 6.3% in 2007-08 to a decade low of 5.47% in 2015-16. A nation of over 125 crore people had only 76 lakh taxpayers with an income of above INR 5 lakh (75% of which are salaried and can't escape the tax net!). The numbers show why only 2% of our GDP comes from personal income tax, lowest in the world! The initiatives mentioned above are expected to widen the tax base and improve the tax-GDP ratio, impact of which will be included in the 2018 Budget.

Increase in Tax Compliance

We believe that the government will also bite the bait and unveil a major rehaul of the direct tax structure in 2018 budget, which would be wide-reaching, covering more people, and create more punishment for tax-avoidance. On one hand, this would be a major plank to woo the electorate and on the other, it would help manage the fiscal deficit. The caveat is that the rising oil prices may play a spoilsport as the indirect tax collections are yet to stabilize, reducing the bandwidth for the government to take drastic steps.

There are fundamental reasons for refurbishing the direct tax regime. External pressure is one. United States has pledged to reduce the tax on corporate earnings to 20 percent from 39 percent and the UK is already following similar footsteps. We believe that 2018 budget will rationalize headline corporate tax rate from 30% to 25% while keeping the surcharges intact and lower the exemptions to balance. The Budget 2018 will also lay down a clear roadmap for taking down the tax rate over the next 3 years, in line with the government promises in 2015. This would help the corporates plan more investments, taking the job creation up, which has been an Achilles' heel for the government.

Focus on Unemployment

According to the UN-ILO, unemployment level is set to rise in 2017 & 2018. India has had a jobless growth for the last decade and is set to continue. BJP poll plank was jobs and Budget 2018 is the last chance to deliver on the same. The budget will have several measures to increase infrastructure spending to grow jobs, along with increasing customs duties and opening up FDI to shift more manufacturing and services to India. As the informal sector has been hurt the most with the crackdown on the parallel economy, Budget 2018 will have sops for the small-scale sector and bring low levels of taxes for the ease of compliance.

Wider and Transparent Personal Income Tax

To appease its vote bank of middle-class voters, we believe that the government will implement the suggestions made earlier on the personal income tax and make it wider and more transparent. We believe working on the lower slabs will have a more positive impact without impacting the budget balance. If the exemption limit is raised to INR 5.0 lacs from INR 2.5 lacs and other slabs widened, the positive sentiment would help the nation and help more people file taxes, reducing the parallel economy. This would make the Budget 2018 more unique and path-breaking than the earlier budgets have been.

Revival of Stalled Projects

Another key area that the Budget 2018 will focus on is to revive stalled projects. A mix of promoter exuberance, global slowdowns, policy changes, poor investment decisions and commodity price falls, has led to rise in bad loans for the banks leading to a slowdown in investment activities and stalled projects. While a few steps have been taken to sort out the mess, Budget 2018 will take significant steps to help revive the stalled projects, which will help in reducing bad loans as well as job creation.

We believe that the Budget 2018 will be historic in more ways than one as it is the last major budget before the elections and the government will be more than willing to showcase its intent for 2018, in preparation for the elections. We just hope that it does not derail the fiscal deficit too much!

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