FM Sitharaman rules out any immediate plan for expenditure reduction

Nirmala Sitharaman ruled out any expenditure cuts as of now, saying that her ministry was asking for a quick release of money by departments and ministries
Union Finance Minister Nirmala Sitharaman on Sunday said she hoped steep cuts in corporation tax rates would increase compliance, prompting her to stick to the fiscal deficit target for now.

“A call will be taken at the RE (Revised Estimates) stage,” Sitharaman told mediapersons, two days after she announced big-bang tax reductions for companies.

The cuts would cost the exchequer Rs 1.45 trillion a year.

She ruled out any expenditure cuts as of now, saying that her ministry was asking for a quick release of money by departments and ministries.

Even as bond yields went up after the announcement on Friday, the finance minister said she had not taken a decision on revising the borrowing limit for the second half of 2019-20.

She has also not considered going for foreign currency-denominated borrowings.

The government has budgeted for Rs 7.1 trillion as gross borrowing in this fiscal year. Of this, Rs 4.4 trillion, or about 62 per cent of the total, is being borrowed in the first half.

Gross borrowings are almost equal to the Centre’s fiscal deficit in absolute terms. In proportion to GDP, the fiscal deficit is pegged at 3.3 per cent for FY20. The deficit has touched almost 78 per cent of the Budget Estimates in just four months of the year. Even before the cuts, direct taxes grew at a muted 5 per cent till about the middle of September, increasing the required growth rate to 27 per cent in the remaining part of the year from around 17 per cent assessed in the budgetary estimates. GST collection has remained placid till August with the mop-up in two months being less than Rs 1 trillion each and none of the months reporting Rs 1.17 trillion, which was the target. 

Recalling that she made a decision to go for tax cuts in two days, the minister said the rates were low compared to Southeast Asia’s. If any assessment had been made as to how much investment would flow into India following these announcements, she said the rough number could come only by November. 

However, if Apple shifts to India with its entire eco-system, it would be a signal for foreign companies to set up shop here, she said. Apple has been demanding various sorts of tax concessions to start manufacturing in India. Now the low corporate tax structure has come for all new manufacturing facilities, she said. To a query that there are still procedural issues coming in the way of companies coming in India, she disclosed that foreign investors had told her that the biggest obstacle was that taxes were too high in India.

“The top consideration on which India was rejected as an investment destination is now better than everybody else ... For someone who is coming up with new investment, no country is offering 15 per cent (tax rate). We are giving 15 per cent with no MAT (minimum alternate tax) and simpler taxation structure,” she said. India has now become an attractive destination for companies to relocate supply chains from China, the finance minister said.

Quoting experts, she said India was much better than China in terms of rates, transparency, and tax administration.

“Apple and its entire ecosystem’s moving will have a greater impact. Everyone who comes now will straightaway get 15 per cent tax benefit. Component manufacturers of Apple in China will find India more attractive to have units at 15 per cent in India,” she said. Also, there is no sunset clause on these announcements, which has removed any uncertainty in the minds of investors. “The decision was absolutely simple and clear-cut. It leaves out any scope for interpretation,” she said. 

She said once the decision had been taken, it would be difficult for anyone to raise the corporation tax rates. “Anyone doing this will have to go to Parliament and explain the rationale for doing so,” she said.

Sitharaman said the decision was taken after industry and experts questioned her about structural reforms following her announcements on sectoral packages. “First, we made sectoral announcements, beginning August 23, almost a week after the prime minister's Independence Day speech. But, then industry asked us where the structural reforms were,” she recalled. 

The same demand came up when Sitharaman visited various places in the country for understanding tax issues on the ground.  The finance minister on Friday announced a corporation tax rate cut to 22 per cent from the current 30 per cent for firms not availing of exemptions. This comes to 25.17 per cent after surcharges and cess from 34.94 per cent at present. When asked how the figure of 22 per cent was arrived at, Sitharaman said she wanted to bring the overall incidence to 25 per cent.

To a query, she said she had not applied her mind to personal income taxes and just glanced through the report submitted by a panel on the direct tax laws.” 

Sitharaman did not agree that the cuts were just supply-side measures, since increase in corporate tax profits would also lead to more dividend in the hands of investors and increase in consumption.

Sitharaman said she and her team were worried on Friday as an official from the finance ministry could not meet President Ram Nath Kovind on time that delayed approval to the Ordinance. The press conference had been scheduled for 10 am in Panaji. However, it could start at around 10.30 am.

Air India disinvestment on track

Finance Minister Nirmala Sitharaman on Sunday said disinvestment in Air India was on track and the group of ministers (GoM) would meet this or next week.  The GoM, headed by Home Minister Amit Shah, has met only once so far.  The finance minister also said disinvestment in 23 central public sector units, cleared by the Cabinet Committee on Economic Affairs, is on track.  There is no plan to revise disinvestment target as of now, she said. The government has budged Rs 1.05 trillion from disinvestment for the current financial year against Rs 85,000 crore received in the previous fiscal year.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel