Budget Unclean Slate
Current Situation:
- After the finance minister recently submitted the Union Budget for 2023–2024 to Parliament, much of the debate centred on the Centre’s fiscal policy and spending objectives.
- However, the documents that go with the budget also offer helpful tidbits of knowledge about the corporate, home, and government sectors, which has the effect of modifying the way the Indian economy is structured.
The Budget for 2023–24 highlights the following four major points:
- First off, the situation for bigger companies has probably never been better than it is now.
- A few major companies now control a disproportionately significant amount of the overall corporate universe, which is in line with the trend of the rising share of capital and the declining share of labour in national income.
- Of the more than 9 lakh entities that submitted reports for the 2019–20 tax year, 433 of them showed profits (before taxes) of more than Rs 500 crore. This increased to 517 in 2020–2021, the first year of the pandemic.
- In 2020–2021, these 517 businesses generated 62.08 percent of the corporate sector’s overall profits. Together, these 2,075 businesses (who account for barely 0.2% of the whole corporate sector) accounted for 77.41% of all profits. Add to that the 1,558 enterprises whose profits ranged from Rs 100 to Rs 500 crore.
- In contrast, the business sector’s overall profits in the year before the pandemic were made up of 75.2% of companies with profits over Rs 100 crore. According to information on publicly traded corporations, this profit concentration is likely to have persisted in the years that followed.
- Even if MSMEs and the larger informal sector have started to show signs of revival, it is difficult to say whether this startling economic power concentration has changed.
- Second, the effective tax rate for these 517 enterprises comes to about 19.14%, which is significantly lower than the rate for the smaller companies.
- The tax rate was 24.82 percent for businesses with profits between $0 and $1 billion and between $1 and $10 billion, respectively. According to the records, these tax rate differences indicate that the larger companies have either switched to the new tax system with lower rates or have taken advantage of the higher deductions or incentives under the previous tax system.
- (In September 2019, the government permitted businesses to pay tax at a rate of 22% so long as they didn’t take advantage of exemptions or incentives.
- Additionally, new businesses making new investments in manufacturing were taxed at an even lower rate of 15% in order to attract new investments.)
- Additionally, there are hints that this regime may have reduced tax disputes. The amounts in dispute, which had increased from the prior year in 2020–21, decreased in 2021–22.
- Nevertheless, despite strong hopes, only 3,508 businesses chose the 15% tax system during this time. This shows that possibly not enough new private sector investments in the industrial sector were stimulated by lower tax rates.
- Third, despite expectations, the new personal income tax system has not gained much traction to date. However, it’s feasible that the modifications being suggested right now will make it more appealing. Whether people transition to the new system will depend on how much they use the current exclusions.
- According to chapter VI-A, section 80 of the Income Tax Act, there are four main exemptions that people can take advantage of: investments, health insurance, the new pension plan, and rent payment.
- The amount of money the government loses out on is as follows: investments cost the government Rs 74,937 crore; pension costs Rs 4,810 crore; health insurance costs Rs 6,444 crore; and rent costs Rs 1,361 crore.
- Back of the envelope estimates indicate that the tipping point may be a bit less than Rs 9 lakh if a salaried taxpayer takes advantage of exemptions for investments and medical insurance.
- However, the income level at which a person will desire to transfer to the new tax system will increase the more exemptions that are claimed.
- However, given that only a small percentage of taxpayers actually use all of these exemptions and that the government’s revenue loss gives some indication of how frequently each exemption is used, there is a good chance that more taxpayers will favour the new tax system.
- However, how much will also depend on how much each person expects to eventually use these exemptions. This will have an impact on the consumption spike that those in charge of the switch predict.
- Fourth, a larger portion of the economy’s overall investment activity is now accounted for by the larger public sector, which includes federal, state, and local governments as well as central public sector businesses.
- By the end of 2022–2023, capital expenditure funded by the Union budget would account for just under 25% of all investments (gross fixed capital formation) in the economy when combined with funding from state governments and central PSUs.
- Since 2014–15, their share has increased by about 5 percentage points. It is likely that the share of the public sector in total investments in the economy would inch closer to 30% in the coming year if state governments were to just match the central government’s budgeted increase in capex. In the past, state governments have tended to allocate more for capital expenditure than the Center.
Conclusion:
- A broad-based recovery in private sector investments and consumption has not materialised, despite larger companies reporting record profits, lower tax rates for both corporate and household sectors, and an increase in public sector capital spending.
- Therefore. With the Indian economy’s evolving structure, it is imperative that the private sector take a proactive role in investment, economic growth, and job creation.
