The segregation of taxation policy from the annual budget exercise must be achieved across investor classes, products and services categories. With the GST rollout last July and periodic tweaking of rates on products and services, the Union budget will limit itself to changes in direct taxes only. After reduction in GST rates on 200 items a few weeks ago, the GST council headed by finance minister Arun Jaitley reduced rates on 29 items and 54 services on Thursday. This process will have to continue at least every quarter till the two-rate structure is achieved over two years. Given that indirect taxes and a host of other small levies have come under the GST umbrella, the budget exercise has been made simpler with only legroom to revise corporate and income tax rates. While the Arbind Modi panel recommendations were key to tinkering with direct taxes, Jaitley’s task becomes easier.
Once a unified market for products and services becomes a reality under the GST regime and simultaneous direct taxes reforms are unleashed, taxation in India would become predictable and companies would then be able to easily forecast tax liability. The annual budgets from now on should focus more on economic policy reforms, liberalisation and integration of Indian markets globally. Even as the budget exercise would lose some sheen, it could well become an occasion for the government of the day to make politico-economic statements from the immediate to the medium term.
In effect, discretion and exemptions-based tax revision will lead to rule-based mop up of tax revenues. This is a huge sign of maturity in the economic policy making process. Once the financial sector and market-related reforms are completed at the government level, finance ministers can focus on social sector revamp to put in place measures to provide time bound quality services in areas like healthcare and education. In a modern, open and transparent economy, annual budgets could become passé.
In fact, the finance minister should think in terms of presenting the Economic Survey and statement of accounts that may still need the Parliament’s approval. There’s no harm in presenting the taxation policy once in three years like several countries in Europe and US. For instance President Donald Trump undertook the biggest restructuring of US Tax Code in 30 years that focused on slashing corporate taxes to 21 per cent from an earlier 35 per cent.
Though India has a long way to go, GST and direct tax reforms will have to set the momentum for stabilisation in rates and slabs. In effect, India will have set a base for taxation regime that’s investment friendly and competitive.