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| Edited By: Venkatesan Vembu |Source: DNA |Updated: Mar 16, 2018, 05:33 AM IST
Corporates and individuals may be wondering if the draft tax code that finance minister Pranab Mukherjee unveiled last week will lead to a higher outlay, but in the opinion of some economists, the proposals may “further undermine India’s already poor structural Budget position.”
“One of the weaknesses of the draft document,” HSBC economist Robert Prior-Wandesforde told DNA on Monday, “is that we don’t know what the net impact, or even the estimated net impact, will be on the corporate sector, on individuals or on public finances as a whole.”
“We’ve got the potential for a headline corporate tax cut of 5% but we’ve also got some tax exemptions that are being removed,” Prior-Wandesforde noted. In principle, the direct tax reform proposal is a “very sensible and well-trodden route”: cutting direct taxes to provide supply-side benefits to the economy and boost productivity.
“But the problem,” he added, “is that given the size of India’s fisal deficit… and the lack of clarity about the rate at which indirect taxes (GST) will be set next year, it would have been better to do it differently: try and raise the revenue first and then see how much money is available for direct tax cuts.”
Even the proposals to raise revenue — by cutting back on tax exemptions and clamping down on tax evasion — do not inspire confidence that they will succeed, he said.
Aninda S Mitra, VP and senior analyst at Moody’s Investor Services, however, says the tax code proposals in themselves do not have implications for India’s sovereign ratings. “As long as the lowering of the direct tax rates are harmonised with the implementation of the countrywide GST programme, it isn’t a problem,” Mitra told DNA from Singapore. “I don’t see a problem on a structural basis.”
“However, if overall economic growth is slightly lower than expected, it could have a short-term cyclical impact on the recovery of deficit levels to a more comfortable level,” he added.
From an economic perspective, the timing of the tax code proposals are “slightly unfortunate,” said Prior-Wandesforde. “The combined central and state Budget deficit is more than 10% of GDP and rising; the Centre’s deficit for April-June was 44% higher than the same period last year; and big new structural spending commitments have just been detailed in the Budget.”
