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Confusing Signals

Tax System Changes in the Budget

There were high expectations from the budget on the changes in the tax system to provide stimulus to the beleaguered economy. However, fiscal conservatism has prevailed. The attempt to broaden the base by eliminating tax exemptions and preferences could have been done without complicating the tax structure. On the macro side, there are questions about the unrealism of the revenue estimates. Unduly optimistic estimates result in “tax terrorism,” lead to inefficient budget management and have adverse impacts on state finances.


Every year, the union budget raises expectations on the changes in tax policies as it has a direct impact on the disposable incomes of households. However, after the implementation of the goods and services tax (GST), calibrating the indirect tax policy has been left to the GST Council and the role of the central budget is confined to excise duties on petroleum products and customs duties. Thus, the focus of the union budget is mainly on the direct taxes.

This year, there were at least three reasons for expecting significant changes in the tax system. First, it was hoped that the budget would be used to revive the slowing economy by propping up sagging consumption and investment demand. The second quarter of the year witnessed gross domestic product (GDP) growth of just 4.5% which was the lowest in 17 quarters, and excluding the contribution of public administration and defence, the growth rate was a meagre 3%. The estimated 5% for the current year is the lowest in seven years. It was hoped that the budget will provide relief to middle-class consumers which will help leave a larger proportion of disposable incomes in their hands to prop up consumption demand to provide stimulus to the economy. Second, having rationalised the corporate tax by reducing the rates for those companies that would give up exemptions and preferences, it was expected that individual income taxes too would be aligned to the new tax regime. Individual income taxes apply not merely to individuals, but also to Hindu Undivided Families, Association of Persons and non-corporate businesses. Aligning them to the new corporate tax regime is important to avoid anomalies in the rates between small businesses and the corporates. Finally, the recommendations of the committee to recommend changes in the Direct Taxes Code (DTC) has been with the government for quite some time and it was hoped that some of the recommendations of the committee would see their implementation in this year’s budget. Indeed, the budget speech by the finance minister claims to advance reforms to stimulate growth, simplify tax structure, bring ease of compliance and reduce litigation. It is useful to evaluate the budget proposals from these perspectives.

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Updated On : 2nd Mar, 2020


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