GIBS B-School View on Union Budget 2016… – March 28, 2016

GIBS B-School View on Union Budget 2016

GIBS is one of the best MBA school in India which gives the following views on the recent budget:

The Union Budget 2016 has been crafted under the most extraordinarily challenging economic settings India has seen. The challenges faced are:

  • Risks of further global slowdown and turbulence. Additional fiscal burden due to 7th Central Pay Commission recommendations and OROP.
  • The external environment is both uncertain and volatile, the inherited deadlock caused by stressed banks and the strained private sector is yet to be broken, poor monsoons have caused immense rural misery, and demand, a central pillar of growth, has been lukewarm.

Many of the measures needed to face up to this challenge are not, strictly speaking, financial. However, it has a much greater sense of purpose and direction. It signals macroeconomic credibility by adhering to fiscal deficit targets.

The ambitious provision of LPG connections to all is quite revolutionary, for its health, gender justice and aspirational effects, though its political-economy effects on the subsidy bill will become apparent over the next few years. It goes to great lengths to reverse the government’s pro-corporate image.

The principal tax rates have reached stability. The rates of direct taxes are comparable to international rates (except for personal tax brackets, which vary across countries on account of differing price levels); and indirect taxes are in a long process of replacement by the Goods and Service Tax, which is stuck in disagreements between States.

A rise in indirect taxes, as opposed to direct taxes, is a clear case of regressive taxation because both poor and rich pay the same tax per unit of purchase of an item. That this has been the pattern of revenue mobilization and the previous government goes to show their concern for the ‘aam aadmi’. For 2016-17, the Finance Minister has promised to bring this ratio down to 3.5 percent primarily through a 20 percent increase in indirect taxes and as much as 39 per cent in excise duties, even as the corporate taxes go down.

There is another problem an increase in indirect taxes brings to the table: inflation. The fact that the economy is not witnessing high inflation today is not because of any prudent monetary policy but because the oil prices are at a real low — that might not be the permanent state of affairs in the coming year. If the oil prices go up, with these hiked indirect tax rates, inflation might hit the roof.

The odd changes in taxation provisions for future provident fund withdrawals make it a budget hostile to the middle class.

The salaried class is likely to feel hard done by a move to tax 60 per cent of the corpus created from contributions to the Employees’ Provident Fund starting April 1 as part of a move to create a ‘pensioned society.’

So, it can be observed that the budget has been designed keeping all classes in mind. There are a few loopholes which can be rectified with proper planning at the grassroots.