FM Jaitley hints at tax rate cut; says demonetisation will increase taxation base

Finance Minister Arun Jaitley
Finance Minister Arun Jaitley on Tuesday hinted that tax rates might be brought down as demonetisation is likely to bring in higher tax revenues from unaccounted wealth. In a statement released to the media, Jaitley said that a substantial quantum of future transactions would be digital as India moves towards a less-cash society.

“Once they are substantially digital, they get caught in tax net. Therefore, the future taxation level would be much higher than what is currently being collected. This would also enable the government at some stage to make taxes more reasonable, which will apply to both direct and indirect taxes,” he said.


The statement came roughly one-and-a-half months before the Budget 2017-17, which is expected to be tabled in Parliament on February 1.


While Jaitley did not refer to the Budget, it is widely expected that the central government might announce a number of direct tax sops for individuals as well as the corporate sector in the Union Budget for 2017-18 to soften the ‘pain’ of demonetisation.


The Budget might have revisions of the tax slabs, reductions in the corporate tax rate, and more tax exemptions or rebates in certain cases.


The government recently gave a number of incentives and discounts to promote digital payments.


Jaitley also warned of a “heavy price” that unscrupulous elements will have to pay for amassing large amounts of cash unlawfully, saying agencies were keeping a close eye on them.


Meanwhile, the initial public support to Prime Minister Narendra Modi’s demonetisation move is likely to face the law of diminishing returns.


But, senior government advisors said the worst of the currency scarcity would soon be over and the PM would announce tax breaks for the middle class and schemes for the poor in the new year, to correct the negative perception. The contours of these schemes are being worked out in consultation with senior leaders of the Bharatiya Janata Party (BJP), the Rashtriya Swayamsevak Sangh (RSS) and key ministers.


Officials said signs of a turnaround in the availability of currency notes would be evident by December 20 and the situation would ease significantly by January 10. This will largely be because sufficient new Rs 500 currency notes will be available.


According to Jaitley, the currency situation will improve in the next three weeks. 


The PM is expected to announce a slew of sops for farmers, small traders and owners of micro, small and medium enterprises, and the youth. The first of these could be announced at a public rally in Lucknow on January 2, the first working day of 2017. The January 2 public rally was scheduled on December 24, when the BJP’s Parivartan Yatra across Uttar Pradesh (UP) would culminate. But, it was postponed because of the December 31 deadline to exchange old currency notes. Elections to UP and four other Assemblies are slated in February-March.


The government was exploring options to see if it should ask the income-tax (I-T) department to target only the “big fish” and not antagonise traders. It could ask the I-T department to only scrutinise bank accounts that have seen deposits above a certain limit between November 9 and December 31. The department is also studying if this cut-off should be fixed at Rs 8 lakh or Rs 12 lakh.


A selective waiver of interest on crop loans in identified areas and cash transfers to youth as unemployment dole are also in the offing, to immediately change the anti-note ban discourse. The Sangh Parivar also wants the government to reach out to its traditional support base of small traders and business.


On Wednesday, Minister of State for Finance Arjun Ram Meghwal would address an event organised by the Laghu Udyog Bharati, an RSS affiliate, and speak on ‘The Impact Of Demonetisation On Small Industries: Its Causes & Remedies’.

BJP chief Amit Shah also dropped enough hints of the sops to come. At a BJP workers’ rally in Chhattisgarh on Tuesday, Shah reiterated that the black money recovered would be used for the benefit of the poor, youths, Dalits, tribals and women.