Union Budget 2017 – Income tax relief v/s Corporate tax relaxation

The following article is based on my own interpretation of the said events and/ or publicly available information. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

 

Ronak R Choksy, MBA 2016-18, Vinod Gupta School of Management, IIT Kharagpur

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Perhaps the only other thing in India that gets as much attention as cricket and Bollywood, is the Union budget. There already are a lot of eyes on the budget session that is coming up on the 1st of February. This year’s budget is special due to a number of reasons. Firstly, for the first time, the Union budget and the railway budget are going to be announced together and on February 1 instead of the usual February 28. Secondly, Uttar Pradesh Legislative Assembly elections are due in February. A populist budget has the potential to turn around the UP elections in BJP’s favour. And most importantly, this will be the first budget after Prime Minister Narendra Modi’s bold demonetization move in November.

Demonetization has reduced people’s spending. There are concerns over slower GDP growth of our country as a result of demonetization. IMF has cut India’s growth forecast to 6.6% from 7.6% after demonization. Hence, most people believe that the government might relax the income tax slabs to boost public spending and get the GDP back on track. According to most newspaper speculations, basic tax exemption limit should be increased to from the current Rs. 2.5 lacs. But in my opinion, such a tax relief will not help much in boosting spending because only 1%-2% of the Indians (or roughly 4% of labour force) pay taxes. Instead the budget might focus more on boosting agriculture and rural economy as they were the most hard-hit among all. The government may also consider lowering corporate tax rates to enhance the economic growth. Lower corporate tax will boost corporate investments in research and development and infrastructure and will also create more employment. This will also attract more foreign investment in India. Lower corporate tax may not necessarily mean lower revenue for the government. In fact in the past we have seen an increase in government revenue after lowering corporate taxes. Hence as compared to relaxing income tax, decreasing corporate taxes makes more sense in this situation.

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