Union Budget 2021-22 must be a game-changer to vanquish the daunting impact of pandemic

Union Budget 2021: The novel corona-virus popularly known as Covid bought with it a lot of challenges, not anticipated by the population at large. It caught everyone completely off guard. The lockdown imposed took a heavy toll on the economy and shattered the aspirations of many blue and white collared workforce at large. Many lost their jobs, the economic activity was at an all-time low; besides, the plight of the migrant workers cannot be described in words. Almost all the sectors have been adversely affected as domestic demand and exports sharply plummeted.

All this has led everyone to think and ponder on a very crucial aspect, which many are aware of but hardly cared about. We do care of our jobs and earning well, but do we really care to build strong investment choices such that these unforeseeable circumstances do not affect our financial foundations and make us feel secure.

An investor with a diversified portfolio not only could ride through the difficult time, but could actually take advantage of the situation. Different asset classes perform well at different times and having them in your portfolio means the risks are covered.

India needs to get back to a higher GDP growth plane and that needs higher spending, higher savings and higher investments.

Mutual funds are an excellent investment option for the individual investors to get exposure to an expert managed portfolio. Mutual funds are a cost-effective way to diversify one’s portfolio across different asset categories and industry sectors with low risk, professional management, liquidity and economies of scale.

Mutual Fund (MF) industry’s Assets under Management (AUM) grew from Rs. 10.96 lakh crore in October 2014 to Rs. 28.22 lakh crore in October 2020. To boost the increased investment through mutual funds and take mutual funds to the next level the Mutual Fund Industry is expecting some path breaking reforms in the upcoming Union Budget 2021 such as putting debt funds at par with listed bonds and tax breaks on debt funds, Rationalizing TDS on mutual fund dividends, paring with ULIPs and authorizing Mutual Fund Retirement Plans at par with National Pension Scheme (NPS).

While every industry wants to flourish, being responsible citizens of the country, it is the foremost duty of every citizen to pay taxes on time and contribute to the development of the nation.

Paying Income Tax in India is important and compulsory as it is undoubtedly the most important source of revenue for the Indian government. It is established as an inevitable imposition on the citizens to raise funds for fulfilling the development and defence needs of the country. The significant chunk collected from income tax is spent on improving healthcare in India and on various welfare schemes.

It is important to follow voluntary tax compliance. The Government has been supportive which is evident from the reduction in rates and various reliefs including time granted for compliances provided to the industry. These will go a long way in boosting consumption and reviving demand in the economy and will provide relief from hardship.

As a very little time is left for the presentation of Union Budget, a lot of expectations are presented before the Hon’ble Finance Minister. At the crucial juncture of Covid-hit economy, the Union Budget 2021-22 must be a game-changing one not only to vanquish the daunting impact of the pandemic but also to put India on a road of enhanced living standards with highest ever allocations for social infrastructure including health, education, skill development, policing and judiciary with measures related to refuel demand vis-à-vis direct tax reliefs to middle class to increase the personal disposable incomes.

It is expected that a higher limit of presumptive taxation should be formulated and encouraged for compliance. It should attract large number of tax payers if its simplicity and ease of compliance is widely circulated and understood by taxpayers. It is also important to bring the changes in the personal slab rate of individuals similar to recommendation made by the Task force. This will ensure further liquidity in the economy.

Also, the current exemption limits for various allowances granted by an employer to the employee are considerably low as the same were set decades ago. The limits need to be enhanced, so as to bring them in line with the rising inflation and cost of living. By linking the upper limits of the exemptions to the Cost Inflation Index, the need to amend the sections time and again will be done away with. Tax payers would automatically get advantage of increased limits in line with inflation.

An assessee is allowed deduction up to Rs.1.5 lakh under Section 80C on investments made in the specified modes. To provide an incentive to taxpayers to save and invest, the limit of Rs.1.5 lakh may be considered to be increased to Rs.1,90,000/- (Based on CII index). Further, separate deduction of Rs.50,000 in NPS shall be allowed. Increased saving will help in investment in industry/other infrastructure activities by the government at much lower cost with availability of funds for longer period.

Increase in the tax to GDP ratio must be focused to achieve the average of emerging markets which is at around 22% of GDP and India’s tax to GDP ratio is currently at around 17% of GDP. Lower tax rates will increase the tax base and tax to GDP ratio. At this juncture, we suggest capping the Personal Income Tax rates at 25% with no exemptions will increase the level of compliance and willingly get more tax-payers in the tax base.

The robust growth of infrastructure is the key ingredient to realize the vision of Atmanirbhar Bharat. The Government should consider raising investment funding for the National Infrastructure Pipeline (NIP) through borrowings from overseas markets by the issuance of overseas bonds through an SPV that could act as a mega Development Financial Institution- DFI.

The DFI could initially finance public sector infrastructure projects, and, as the economy picks up steam, could also finance the private sector infrastructure projects. In the past, Governments around the world have often used DFIs to fund industrial and infrastructure investments. Financial, as well as technical support extended by DFIs, would help in efficient and timely infrastructural development in the country. Overseas borrowing will allow the government to bring in diversification in its borrowings along with significantly reduced dependence on the domestic market, thereby leaving room for private sector to raise capital for investments. The development of DFIs can be structured in debt and equity. With a golden share of the equity with the Government, DFIs can invest in infrastructure projects with a significant proportion of debt and equity for their long-term sustainability.

We have strong external sector fundamentals, analyzing the Debt to GDP ratio of G20 economies, India is at a significantly better position in the G 20 economies. India stands at 7th rank with total debt to GDP ratio at 127.6% comprising of 55.3% as private debt and 72.3% as public debt. In the fiscal deficit scenario, India’s position is also not that much worse as some of the G20 economies. According to the recent IMF data, India is positioned at 13th rank in the General Government Net Borrowing/ Lending as percentage of GDP in the G20 economies. Also, we have significantly high FOREX reserves of around US $581 billion.

(By Sanjay Aggarwal, President, PHD Chamber of Commerce and Industry)