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Budget 2016-17: Reform, fiscal commitment and more.

by Dr. Rathin Roy, Director, National Institute of Public Finance and Policy (NIPFP), New Delhi

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Budget 2016-17
-Reform, fiscal commitment and more.
Dr. Rathin Roy
Director
National Institute of Public Finance and Policy, New Delhi
March, 2016
A reform -focused budget that enhances fiscal
credibility
 In the run-up to the budget, there has been a debate on
the desirability of sticking to fiscal consolidation. The
economic survey tantalizingly presented both sides of
the argument.
 The government has maintained its commitment to stick
to the fiscal consolidation path. It has maintained the
fiscal deficit at 3.9% of GDP in FY 2015-16. It has
reduced the revenue deficit to 2.5% from the projected
2.8%.
 Thus, the 15-16 revenue/fiscal deficit ratio is 63.84%
the lowest since FY 2007. The government has also
committed to deliver a fiscal deficit of 3.5% and a
revenue deficit of 2.3% of GDP in FY 2016-17
RD/FD- Centre
4.5
29.5
41.7
49.3
64.5
71.6
71.1
74.3
79.7
62.4
63.1
56.3
41.3
75.1
81.0
67.6
76.4
74.3
71.1
71.6
71.1
63.8
66.3
1981-82
1986-87
1990-91
1995-96
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
BE
2015-16
RE
2016-17
BE
Fiscal Stance
(% of GDP)
2014-15
2015-16
BE
2015-16
RE
2016-17
BE
Revenue Deficit 2.9 2.8 2.5 2.3
Fiscal Deficit 4.1 3.9 3.9 3.5
Revenue/Fiscal Deficit Ratio 71.57 71.0 63.84 66.31
Revenue Receipts (A+B) of which 8.84 8.10 8.89 9.14
i) Gross Tax Revenue 10.0 10.3 10.76 10.83
ii) States share 2.71 3.71 3.73 3.79
A. Net Tax revenue to centre (i-ii) 7.25 6.52 6.98 7.0
B. Non-Tax Revenue 1.59 1.57 1.91 2.14
Fiscal Arithmetic
Change over previous year
(% of GDP)
2015-16 (BE)
over 2014-15
Actuals
2015-16 (RE)
over 2014-15
(Actuals)
2016-17 (BE)
over 2015-16
(RE)
EXPENDITURE
Total Revenue Non-Plan Expenditure -0.36 0.03 -0.13
Total Capital Non-Plan Expenditure 0.02 -0.03 -0.04
Total Non-Plan Expenditure -0.34 0.00 -0.16
Total Revenue Plan Expenditure -0.53 -0.40 0.21
Total Capital Plan Expenditure 0.12 0.20 -0.08
Total - Plan Expenditure -0.42 -0.20 0.13
Total Budget Support for Central Plan 0.31 0.38 0.12
TOTAL EXPENDITURE -0.76 -0.20 -0.03
Total Central Assistance for State (Rev+Cap) -0.73 -0.59 0.02
Change in public investment
-0.1
0.3 0.0
-0.1 -0.2
0.0 0.5
-0.1
0.0
0.1
0.2
2015-16 BE 2015-16 RE 2016-17
Proejctions
2017-18
Projections
2016-17 BE 2017-18 Rev
projections
2018-19
projections
Change in Public Investment (As % of GDP)
2014-15RE
2015-16BE
2015-16RE
2016-17
Proejctions
2017-18
Projections
2016-17BE
2017-18Rev
projections
2018-19
projections
4.1 3.9 3.9 3.5 3.0 3.5 3.0 3.02.9 2.8 2.5 2.4 2.0 2.3 1.8 1.31.2 1.1 1.4 1.1 1.0 1.2 1.2
1.7
Fiscal Deficit (As % of GDP) Revenue Deficit (As % of GDP) Central Public Investment (As % of GDP)
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Budget 2016-17: Reform, fiscal commitment and more.

  • 1. Budget 2016-17 -Reform, fiscal commitment and more. Dr. Rathin Roy Director National Institute of Public Finance and Policy, New Delhi March, 2016
  • 2. A reform -focused budget that enhances fiscal credibility  In the run-up to the budget, there has been a debate on the desirability of sticking to fiscal consolidation. The economic survey tantalizingly presented both sides of the argument.  The government has maintained its commitment to stick to the fiscal consolidation path. It has maintained the fiscal deficit at 3.9% of GDP in FY 2015-16. It has reduced the revenue deficit to 2.5% from the projected 2.8%.  Thus, the 15-16 revenue/fiscal deficit ratio is 63.84% the lowest since FY 2007. The government has also committed to deliver a fiscal deficit of 3.5% and a revenue deficit of 2.3% of GDP in FY 2016-17
  • 4. Fiscal Stance (% of GDP) 2014-15 2015-16 BE 2015-16 RE 2016-17 BE Revenue Deficit 2.9 2.8 2.5 2.3 Fiscal Deficit 4.1 3.9 3.9 3.5 Revenue/Fiscal Deficit Ratio 71.57 71.0 63.84 66.31 Revenue Receipts (A+B) of which 8.84 8.10 8.89 9.14 i) Gross Tax Revenue 10.0 10.3 10.76 10.83 ii) States share 2.71 3.71 3.73 3.79 A. Net Tax revenue to centre (i-ii) 7.25 6.52 6.98 7.0 B. Non-Tax Revenue 1.59 1.57 1.91 2.14
  • 5. Fiscal Arithmetic Change over previous year (% of GDP) 2015-16 (BE) over 2014-15 Actuals 2015-16 (RE) over 2014-15 (Actuals) 2016-17 (BE) over 2015-16 (RE) EXPENDITURE Total Revenue Non-Plan Expenditure -0.36 0.03 -0.13 Total Capital Non-Plan Expenditure 0.02 -0.03 -0.04 Total Non-Plan Expenditure -0.34 0.00 -0.16 Total Revenue Plan Expenditure -0.53 -0.40 0.21 Total Capital Plan Expenditure 0.12 0.20 -0.08 Total - Plan Expenditure -0.42 -0.20 0.13 Total Budget Support for Central Plan 0.31 0.38 0.12 TOTAL EXPENDITURE -0.76 -0.20 -0.03 Total Central Assistance for State (Rev+Cap) -0.73 -0.59 0.02
  • 6. Change in public investment -0.1 0.3 0.0 -0.1 -0.2 0.0 0.5 -0.1 0.0 0.1 0.2 2015-16 BE 2015-16 RE 2016-17 Proejctions 2017-18 Projections 2016-17 BE 2017-18 Rev projections 2018-19 projections Change in Public Investment (As % of GDP) 2014-15RE 2015-16BE 2015-16RE 2016-17 Proejctions 2017-18 Projections 2016-17BE 2017-18Rev projections 2018-19 projections 4.1 3.9 3.9 3.5 3.0 3.5 3.0 3.02.9 2.8 2.5 2.4 2.0 2.3 1.8 1.31.2 1.1 1.4 1.1 1.0 1.2 1.2 1.7 Fiscal Deficit (As % of GDP) Revenue Deficit (As % of GDP) Central Public Investment (As % of GDP)
  • 7. Public investment- States vs. Centre 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2007-08 2008-09 2009-10 2011-12 2013-14 2014-15 2015-16RE 2016-17BE 1.5 1.5 1.2 1.3 1.4 1.2 1.4 1.2 2.4 2.6 2.4 2.1 2.5 2.7 2.8 Central Public Investment (As % of GDP) States Public Investment (As % of GDP)
  • 8. A reform -focused budget that enhances fiscal credibility  This consolidation has been achieved under very difficult circumstances. Growth has been lower than projected, the external environment difficult, the pressure to spend more from just about every interest group, considerable.  The government has finally bitten the bullet and commenced important structural reforms in the fiscal and financial architecture.  This budget has broken with the horrid tradition of taxpayers harassment. More than half of part B of the budget (on taxation) is about reducing litigation, providing certainty, simplifying and rationalizing the tax system.
  • 9. A reform -focused budget that enhances fiscal credibility  The government has also delivered on its promise made in the last budget, and commenced reducing the headline corporate tax rate while lowering exemptions.  These are strategic reforms which will yield a higher tax-GDP ratio with less taxpayer harassment and greater transparency in the medium term.  I have been depressed and concerned about the bipartisan inability of successive governments to make important structural changes in fiscal management, especially public expenditure reforms.
  • 10. A reform -focused budget that enhances fiscal credibility  The absence of any output in the public domain from the expenditure management commission has only added to my depression.  It is, therefore, heartening to see that the government has initiated a series of concrete measures on this front. It has announced a new policy for management of government investment.  Renaming the department of disinvestment as the department of investment and public asset management is not just optical. Every fiscal entity must have a strategic framework within which it decides what assets to keep and sell, in line with its delivery priorities.
  • 11. A reform -focused budget that enhances fiscal credibility  The use of the word “schemes” to describe public spending initiatives was resonant of fiscal drag and pandering. Every “scheme” will now have a sunset date and outcome report. Commendable.  Government has also decided to do away with the plan/non-plan classification. Presumably, this means that we will have a modern medium-term fiscal framework in place with medium- term allocable expenditure ceilings and a credible revenue forecast, built around a macro-fiscal framework that specifies how much government will borrow to meet its fiscal aims.
  • 12. A reform -focused budget that enhances fiscal credibility  Thus, this budget has put in place all the building blocks necessary to build a fiscal framework which will finally move India from outdated annual budgeting to strategic medium-term fiscal execution.  In this context, I read the proposed review of the FRBM as a step in that direction, unlike many who, I suspect, will see this as a sign that government wishes to backtrack on its future consolidation commitments. Other important reforms -- to the Indian financial code, rationalizing CSSs and targeting subsidies, and improving the ease of doing business -- have also been announced.
  • 13. A reform -focused budget that enhances fiscal credibility  There are, of course, some bad habits in this budget which persist.  The most serious is the continued tendency to increase cesses rather than tax rates to meet intended spending objectives.  This would nominally be an optical matter, but in our system, cesses are not shared with states and imposing these is tantamount to an unfair theft of resources from the divisible pool.
  • 14. Cesses Budget 2016-17 Cess Rate Notes Krishi Kalyan Cess 0.50% At 0.5% on all taxable services, proceeds of which would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers. The Cess will come into force with effect from 1st June 2016. Input Tax credit of this cess will be available for payment of this cess. Infrastrcuture Cess 1% Levied on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity Infrastrcuture Cess 4% Levied on other higher engine capacity vehicles and SUVs. Clean Environment Cess 200 per tonne to `400 per tonne Levied on Coal Oil Industries Development Cess Existing: ` 4500 PMT Proposed: 20% ad valorem Levied on domestically produced crude oil 13 cesses, levied by various Ministries Abolished To reduce multiplicity of taxes, associated cascading and to reduce cost of collection. The revenue collection for these cesses is less than `50 crore in a year.
  • 15. Cesses Budget 2015-16 Cess Rate Notes Education Cess 2% Levied on Income Tax Clean Energy Cess On Union Excise Duty The effective rate of Clean Energy Cess is being increased from 100 per tonne to 200 per tonne. Levied from 1st March 2015 Swachh Bharat Cess 0.5% Government has levied a Swachh Bharat Cess at the rate of 0.5% on all taxable services from 15th Nov 2015. Road Cess The road cess has been increased from Rs 2 to Rs 8 for petrol and diesel, but the effective rate is Rs 6 Levied from 1st March 2015
  • 16. A reform -focused budget that enhances fiscal credibility  There continue to be an unacceptably high number of exemptions and rebates on direct and indirect taxes which clearly pander to specific interest groups and leech revenue that could be used for other purposes. This is a bad legacy that continues.  The share of subsidies in total expenditure has not fallen, despite a fall in fuel subsidies.
  • 17. Rupee Goes to Year States Share of taxes and duties Non-plan assistance to States and UTs State and UTs Plan Assistance Central Plan Other Non- plan expenditure Subsidies Defence Interests Total 2008-09 19 5 7 19 10 8 11 21 100 2009-10 15 4 7 18 14 9 13 20 100 2010-11 16 4 7 21 13 9 11 19 100 2011-12 17 5 7 22 11 9 11 18 100 2012-13 17 4 7 22 11 10 11 18 100 2013-14 17 4 7 21 11 12 10 18 100 2014-15 18 3 15 11 11 12 10 20 100 2015-16 23 5 9 11 11 10 11 20 100
  • 18. A reform -focused budget that enhances fiscal credibility  Like every budget, this one makes grandiose claims and seeks to please political constituencies.  But unlike many in the past, it maintains prudence, enhances credibility of the government as a fiscal manager and initiates important, unglamorous structural reforms.
  • 19. Political Economy of Revenue Foregone
  • 20. Profile of sample companies across range of profits before taxes Profit Before taxes Number of companies Financial Year 2014-15 Number of companies Financial Year 2013-14 Share in Total Corporate Income Tax payable (%) 2014-15 Share in Total Corporate Income Tax payable (%) 2013-14 Effective Tax Rate (%) 2014-15 Effective Tax Rate (%) 2013-14 less than zero 2,54,079 2,28,447 0.47 0.50 - - zero 18,080 25624 2.81 3.98 - - Rs.0-1 crore 2,76,531 2,78,515 3.25 3.41 29.37 26.89 Rs.1-10 crore 26,983 25,613 7.40 7.72 26.99 25.84 Rs. 10-50 crore 5,130 4664 9.48 9.67 25.52 24.99 Rs.50-100 crore 894 853 5.26 5.63 25.14 24.29 Rs. 100-500 crore 895 808 15.12 15.38 23.97 23.11 Greater than Rs. 500 crore 297 263 56.21 53.71 23.97 20.68 All companies 582889 564787 100 100 24.67 23.22
  • 21. Corporate Tax reforms  The new manufacturing companies which are incorporated on or after 1.3.2016 are proposed to be given an option to be taxed at 25% + surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.  I also propose to lower the corporate income tax rate for the next financial year of relatively small enterprises i.e companies with turnover not exceeding `5 crore (in the financial year ending March 2015), to 29% plus surcharge and cess.
  • 22. Corporate Tax reforms  I also propose to lower the corporate income tax rate for the next financial year of relatively small enterprises i.e companies with turnover not exceeding `5 crore (in the financial year ending March 2015), to 29% plus surcharge and cess.
  • 23. Revenue Foregone-Corporate Taxes Major tax expenditure on corporate taxpayers during the financial years 2014-15 and 2015-16 Nature of incentive Revenue Foregone (in Rs. crore) 2014- 15 Projected Revenue Foregone (in Rs. crore) 2015-16 Rank in Budget 2016-17 Rank in budget 2015-16 Accelerated Depreciation (section 32) 41530.56 43856.27 1 1 Deduction of export profits of units located in SEZs (section 10A and 10AA) 16685.53 17619.92 2 2 Deduction of profits of undertakings engaged in generation, transmission and distribution of power (section 80-IA) 9621.02 10159.8 3 3 Deduction/weighted deduction for expenditure on scientific research (section 35 (1), (2AA) & (2AB)) 8401.97 8872.48 4 4 Deduction of profits of undertakings engaged in development of infrastructural facilities (section 80-IA) 4225.3 4461.92 5 7 Deduction of profits of industrial undertakings derived from production of mineral oil and natural gas (section 80-IB) 3227.32 3408.05 6 5 Our supply bottlenecks cost us in terms of tax expenditures
  • 24. Effective Tax Rate-Selected Sectors Effective tax rate, inclusive of surcharge and education cess, of sample companies across industry (financial year 2015-16) Sector Industry Effective Tax Rate (%) Rank in Budget 2016-17 Rank in Budget 2015-16 Financial Service Sector Leasing Companies 1.53 1 1 Manufacturing Industry Sugar 6.95 2 7 Manufacturing Industry Cement 9.01 3 2 Manufacturing Industry Steel 12.06 4 9 Contractors Mining Contractors 14.02 5 3 Manufacturing Industry Power and energy 14.74 6 6 Service Sector Consulting Services 15.88 7 30 Manufacturing Industry Paper 17.34 8 5 Manufacturing Industry Petroleum and Petrochemicals 18.49 9 11 Manufacturing Industry Vanaspati and Edible Oils 19.62 10 14 National Average Effective Tax Rate (%) 24.67