Union Budget 2022-23: The government should give due consideration to individuals, businesses, fintechs for inclusive growth
It’s Budget time and almost everyone has high expectations of India’s finance minister. Like every year, individuals and businesses of all sizes expect tax sops and investment incentives, as the government looks at growing its revenues to fund its expenditures. Before going into taxpayer expectations, let’s examine the financial position of the Government of India.
Before the previous year’s Budget, the mood was dull, with expectations revolving around government support through regulatory measures, and not much around tax cuts. This was because it was well acknowledged that the government faced a double whammy – reduced tax income due to lockdown-induced business activity slump, as well as higher expenditure pertaining to COVID-19 vaccinations and general health. The actual Budget turned out to be in line with these expectations.
Stupendous growth in stock markets
The process of formalisation of many sectors of the economy, which started with demonetisation, GST, and so on, has now accelerated pace, with the pandemic leading to the K-shaped recovery. While economic expansion is gradually happening, hopefully towards the $5 trillion figure, the rate at which the formal economy is expanding is much faster due to measures taken since 2016.
This also partially explains the stupendous growth in the stock market despite the not-so-stellar economic growth on the ground – the larger, established companies are now delivering better products and services by capturing market share from unorganised players. This is evident from the increase in the tax collections – FY22 gross tax revenues are expected to reach Rs 25.1 lakh crores, up from Rs 20.2 lakh crores in FY21 and Rs.20.1 lakh crores in FY20, the last “normal” year. This 25 percent growth is phenomenal, more so considering the fact that the revised FY22 estimates are 13 percent above the figure of Rs.22.1 lakh crores estimated for the year in the previous budget.
Robust GST collections
As far as GST is concerned, December 2021 saw robust collections of Rs 1.3 lakh crores, bringing the monthly average for the year to almost Rs 1.2 lakh crores, heralding a new era of monthly figures consistently above the Rs 1 lakh crore mark. To summarise, it is highly probable that the FM has a smile on her face with a much-better-than-expected fiscal position, and this makes expectations of the budget much higher.
Inflation, only fly in ointment
The only fly in the ointment is the persisting high inflation. Retail inflation measured by CPI is at 5.6 percent, dangerously close to breaching the range of 2-6 percent prescribed by the RBI, while wholesale inflation remains very high at 13.6 percent in December, remaining in double digits for nine months.
What we expect from Budget 2022
Fintech
o Given the stellar role played by fintech in the financial inclusion of a scale unheard of in the past (JAM trinity) as well as digital payments in remote corners in recent times including the pandemic period, the fintech industry expects favourable treatment for this sector which can propel India as a world leader
o While fintech is helping banks serve their customers better, it is also helping other financial institutions (NBFCs, etc.,) serve customers who may not be catered to by banks. Better access to bank funding for NBFCs (e.g. raising the lending cap from the present 5 percent of overall lending) can go a long way in this, especially for smaller NBFCs who may not enjoy a very good credit rating
o An important way new-age fintechs attract the best talent is through ESOPs, which can create a lot of wealth for the employees beyond salary. However, the tax treatment of ESOPs is highly unfavourable, rendering ESOPs useless to a vast majority of employees. Treating stock options differently from regular salary from a tax point-of-view is greatly desirable
Businesses
o For items that have to be imported due to lack of domestic capacity, a reduction in import duties would help check inflation. The income so foregone by the government can be compensated by raising tariffs for the other goods for which we have production capabilities
o Electric vehicles still do not make business sense for a vast section of the population, hence costs can be brought down by tax concessions to EV manufacturers
o With big data and interconnectivity of systems with banking servers, GST compliance needs to be made simpler
o The production-linked incentive (PLI) scheme has already brought in a lot of investments from players looking to diversify their supply chain from China. Expanding the scope of this to also include more smaller businesses will go a long way in democratising the Atmanirbhar industry
o While the above talks about production, we also lack is design capabilities. Countries like China became manufacturing superpowers by investing in R&D through state-sponsored programs. This needs to be implemented here as well; there is no point in building more factories that just assemble imported CKDs
o Supply chain inefficiencies and lack of scale are hampering the progress of Indian industry on a global scale. Encouraging large scale industrial clusters similar to textile and auto SEZs that have been successful models, through investment incentives covering large corporates as well as MSMEs, will really help
Individuals
o Increase in tax slabs, or exemptions to be in tune with recent realities – standard deduction, 80C, etc., have not changed much in decades, while cost of living has surged
o Expanding the scope of housing-related tax benefits including interest subsidy for houses with a larger budget, higher tax benefits for principal and interest payments for home loans
o Reduction of taxes on essential services like banking, telecom etc., from 18 percent to a lower number
o Tax exemptions on financial savings, given the extremely low returns on bank deposits
The author is CEO, BCT Digital. Views are personal
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