Interim Budget – Limited Expectations

On February 1st, the finance minister of India would be presenting the Interim Budget or Vote on Account for the financial year commencing April 1st, 2019. The key question is that since elections are due in May 2019, what should one expect? Dr. Suresh Surana, a chartered accountant and founder of RSM Astute Consulting Group, explores the possible outcomes.

Dr Suresh Surana, Founder, RSM Astute Consulting Group

Can tax reforms be announced in an Interim Budget?

Express legislative prohibition against announcement of major tax policy changes through an Interim Budget do not exist in India. Certain restrictions are imposed by way of Model Code of Conduct (MCC) laid down by the Election Commission of India which comes into force once the election schedule is declared.

The provisions of MCC applicable to the party in power (outgoing government) requires that the party in power, whether at the centre or in the state or states concerned, shall ensure that no cause is given for any complaint that it has used its official position for the purposes of its election campaign and in particular ministers and other authorities shall not sanction grants/payments out of discretionary funds (from the time elections are announced by the Commission); and (from the time elections are announced by the Commission), ministers and other authorities shall not announce any financial grants in any form or promises thereof.

But, if the Interim Budget is presented before the declaration of election schedule, the outgoing government is at full freedom (i.e. there is no binding legal restriction) to introduce any number of policy decisions through the Interim Budget.

Past precedents

Interim Budgets in the past have marginally deviated from the unwritten convention of not initiating major tax reforms in an election year. The Interim Budget of 2004-05 presented by Jaswant Singh had proposed some changes to the taxation regime. It had extended the period of exemption from long-term capital gains for listed equities to three years and likewise extended the fiscal benefits available to new power plants up to 2012 for corporations. Thus, though the interim budget speech of 2004-05 promised reforms in direct tax, none of them were actually carried into effect. The last Interim Budget presented by the then finance minister, P. Chidambaram, in the Congress government, had also announced marginal changes in excise duty rates and provided relief from service tax in certain cases. However, no changes were proposed on the income tax front.

It is difficult to insulate the expectations from the political scenario. The ruling government and the opposition seem set for an intense battle and uncertain outcome. Therefore, considering the need to extend relief to a vast majority, it can be expected that the Interim Budget of 2019 would use the legroom available.

Generally, the outgoing government only passes an appropriation bill, also known as Vote on Account, to meet expenses of the administration till the newly elected government presents a full Budget after elections. However, this Budget is expected to be more than a formal Vote on Account, with some relief to the taxpayers. A Vote on Account usually deals with the expenditure side of the government’s Budget, i.e. only approval for expenses during the intervening period till declaration of general election results is sought after. However, an Interim Budget deals with both expenditure and receipts and as such represents a complete set of accounts being very similar to a full Budget. The Interim Budget does not incorporate estimates for the full year, as the incoming government can partially change or give it a full makeover while presenting the Union Budget after the declaration of election results.

Expectations

Increase in the basic IT exemption limit from the present threshold of S2,50,000 to S3,00,000

The basic exemption limit for individuals and Hindu Undivided Families (HUFs) has not been increased for the past three financial years despite inflation, which ranges from 5% to 7% per annum. The increase in the basic exemption limit from the present threshold of R2,50,000 to R3,00,000 so as to adjust for inflation would provide relief to all individual taxpayers. This could benefit over 5 crore individual/ HUF taxpayers. The increase in the basic exemption limit would benefit the gems and jewellery sector which employs around 46 lakh people. This shall also result in reduced compliance burden on the part of employers in this sector. Though the increase in basic exemption limit shall benefit the taxpayers, it is estimated that every R10,000 increase of basic exemption limit shall lead to a loss of R2,000 crore to the revenue department.

Reduction in cess

The rate of health and education cess, which is 4% of the tax at present, may be removed. This would effectively result in reduction of tax rate from 0.4% to 1.38% depending on the tax slab of the taxpayer. This shall provide huge relief as cess is applicable to all taxpayers.

Administrative relief

The measures such as expediting income-tax refunds, withdrawal of departmental appeals below a certain threshold, grant of GST refunds, etc., will go a long way in improving the taxpayers’ sentiments without amounting to any legislative reform. This would be of great relief for gem and jewellery sector as a part of working capital, which is currently blocked in the process of claiming refunds, would get released and shall, in turn, facilitate more trade in these sectors.

Closing Thoughts

Interim Budgets in the past have not come up with major tax policy changes as discussed above. Any amendment in the Income Tax Act, 1961 can be brought only if the same is passed by both the houses of Parliament. In view of this, it can be said that changes in direct tax may not be expected. One key aspect the markets would be looking for is the fiscal deficit which was estimated at 3.3% in the last budget and given the need for populist measures, the extent of slippage beyond this level.

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