Boosting domestic production is a key performance indicator for any government. This time around, there is also a need to boost consumption and contain the economic slowdown.
This could potentially be achieved by taking absolute measures through which consumers and businesses can have investible cash surplus and at the same time the Centre’s fiscal responsibilities are not diluted.
The early signs of that came under NDA II with the recently announced concessional tax regime incentivising doing of business in India -- A lowly 15 per cent headline tax rate for new domestic manufacturers and 22 per cent for other businesses. While the concessions have got support from stakeholders, it is safe to say we are still in early days to reap the real benefit of the move.
Even though the tax cut has positioned India among globally competitive tax jurisdictions, the Centre may still learn from developed economies that have announced similar reforms in the past. On the positive side, the tax reduction in the US came with a strong economy and low interest rates while India has operational synergies such as labour and land.
For a subject as strategic as reviving the economy, one may need to look at the macro level. In the United States, the rise in demand was an outcome of not just the tax cut but an increase in domestic demand aided by lower personal taxes, which has been a talking point in India for the past few budgets now.
For India, the additional challenge could be from higher interest rates. The government may expect higher consumption after the tax cut, but that can only happen if businesses pass on tax savings to end-users.
Any fresh investments would typically take time to bear fruit. However, the need of the hour is “today”. To take a leaf out of the US book, the Centre may consider bringing down personal taxes for individuals as well as boosting spending in key sectors. While revenue collections may drop, it could be a win-win, which may ultimately spur consumer spending and help revive the economy.
Additionally, the government may consider extending tax incentives in strategic business activities that are being phased out from March 31, 2020 -- particularly the Research and Development (R&D) benefit under Section 35 and tax holiday under Section 10AA for special economic zones (SEZ), which are largely seen as contributing to growth, particularly exports. This could provide a level-playing field for taxpayers, too.
There is a clear shift towards digitising tax scrutiny by devising a more taxpayer-friendly faceless assessment. The government is also encouraging internal accountability by directing prior quoting of a computer-generated document identification number (DIN) in all communications by tax authorities. The intent is to rationalise the long-standing assessment trail.
The government may consider a fast-track dispute resolution forum to help clear the case backlog. It may even look at further optimising pending refunds and possibly look at quicker resolution for taxpayers, potentially translating into cash inflows for them and higher consumption levels. This could be a big positive in terms of higher transparency for investors looking to invest in India.
All in all, the possibility of rolling out a big largesse is unlikely due to fiscal rigidities, especially against the backdrop of the corporate tax cut. How the government goes about implementing reforms will be a matter of deep interest. The next few years may see a jump in investments and it’s highly essential to have measures in place for ease of doing business.Raju Kumar is Tax Partner, EY India. Views are personal.