Finance minister Nirmala Sitharaman has attempted to address most of the issues currently plaguing the economy. An effort has been made to trigger growth in the sectors that will help push GDP growth and generate quality employment. The economy is facing low GDP growth, high unemployment rate, and a crisis in manufacturing. The situation warrants a well thought out strategy that will put the economy back on track to become a high-growth emerging market.
The most important task of the finance minister was to enhance the trust factor after the PMC bank episode. She did the right thing by raising insurance cover on deposits to Rs 5 lakh from Rs 1 lakh. Special effort has been made to end harassment by taxmen, decriminalize the Companies Act and to create a debt restructuring window. These moves will go a long way to attract investors to take advantage of the FPI bonds increase from 9 to 15%.
The changes in personal income tax will bring smile on the faces of middle class tax payers. Six slabs without any deduction or exemption will simplify the current income tax regime. The tax outgo will be calculated individually and the slabs are narrow, based on self declaration. The finance minister has done away with 70 of the 100 exemptions/ dedications to make filing of return easy. This will have an impact on tax compliance.
Dividend distribution tax has been removed, reducing the burden on domestic and foreign investors. Now the tax burden will be on shareholders who receive the dividend. New companies in the manufacturing sector were already enjoying the reduced tax rate of 15%. This is now extended to power generating companies. But how many such companies will come up to take this benefit remain to be seen. The thermal and hydel power companies are in stress and solar companies don’t seem to be in a position to invest afresh.
Infrastructure investment is targeted with additional commitment. Tax advantage to startups has been raised to 10 years, but there is also a need is to have consistency in approach to instill confidence among startups. For MSMEs, the compliance burden has been reduced with an increased turnover threshold to Rs 5 crore.
Expecting GDP growth rate to reach 10% is aiming very high. To achieve this, there should be a holistic decision-making process and timely policy interventions. Fiscal deficit cap at 3.8% is a tough target to achieve and this will need constant focus. The policy makers need to go back to the drawing board and should steer clear of distractions and non-issues.