Chidambaram's Budget tips to Jaitley: Don't slash income tax rate, cut service tax instead

Moneycontrol BureauIn his weekly column in the Indian Express newspaper, former Finance Minister P Chidambaram has offered some “unsolicited advice” for Arun Jaitley, who will be presenting his fourth Budget on Wednesday.Chief among the suggestions are that the government should not cut direct tax rates—income tax and corporate tax—and that it should instead cut indirect taxes like service tax and excise duties to boost demand in the economy.It is widely expected that the Budget will announce relax the income-tax threshold limits to regain the goodwill of the middle class, which has been inconvenienced by demonetization.Chidambaran is not alone in proposing that the government should not cut income tax rates. Last week, former Chief Statistician Pronab Sen had in an interview to CNBC-TV18 advised against a relief in income tax rates.Sen’s view is that apart from reducing its own revenue, the class that pays income tax hasn’t been affected much by demonetization and therefore can afford to pay.The other suggestion by Chidambaram to Jaitley is that the government should not bring back the banking cash transaction tax (BCTT). He has proposed that instead of the BCCT, the government should amend the Income-Tax Act to expand the list of transactions that mandatorily require non-cash payments.Talk is that the government will impose a tax on cash withdrawals to achieve the twin objectives of tracking big spenders and promoting electronic cash transfers.Ironically, it was Chidambaram who had first introduced a 0.1 per cent BCCT in 2005 on cash withdrawals of more than Rs 50,000 (individuals) and Rs 1 lakh for others in a single day from non-savings bank account. “I am concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amounts of cash. These cash withdrawals leave no trail, and presumably become part of the black economy,” Chidambaram had said in his Budget speech while announcing the measure. The tax was later withdrawn in 2009 because of its unpopularity more than anything else.Among other advice, Chidambaram has said that the government should stick to its fiscal deficit target of 3 percent for FY18. The market is expecting that the government may relax the target and announce a fiscal deficit band of 3.0-3.5 percent.With demonetization impacting demand and private investments yet to pick up, it is felt that the government will step up its capital expenditure to keep the engines of the economy purring.