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2017 may be a breakout year for policy making

Gaurav Choudhury

The Cabinet decision to bring forward the presentation of the Union Budget and merge the Railway Budget with it, along with a likely roll-out of the Goods and Services Tax from April 1 next year, could well make 2017 a breakout year for policy-making.

Here’s how:

No Rail Budget

By making the Railway Budget a part India’s main Budget, the government has signalled its intent to walk the talk on freeing the state-owned behemoth from having to deal with stressed finances and political populism.

A key reason for the abandoning the 92 year-old practice of a separate railway budget from 2017-18 may have been hastened by the state-transportation giant’s delicate balance sheet.

It is learnt that the Railways Ministry had sought exemption from paying dividends to the Centre this year, amid rise in additional salary and pension spending following the seventh pay commission recommendations.

A combined budget could free the Indian Railways from setting aside nearly Rs 10,000 crore towards dividends to the government every year.

Once the budgets are merged, the financial stress can be moved to the Centre’s overall annual financial plan.

Railway Minister Suresh Prabhu has been arguing that a combined budget will allow a seamless national transportation policy, insulating the railways from political pressures.

That said, however, a combined budget carries the risk of eroding the railways’ financial and functional autonomy.

Given its highly unionised employee base and high capital expenditure requirements, a separate budget allowed the railways to set its own course. The new budget construct may limit this elbow room to maneuver.

Early Budget

The government has also agreed to advance the Budget’s presentation by a month, to allow tax and policy proposals to kick-in from April 1 itself.

It will enable completion of the budgetary process by April 1, the beginning of the financial year, besides giving companies and households time to finalise their savings, investment and tax plans.

The Budget is usually presented on the last working day of February, a month before the new financial year begins on April 1.

Currently, the Budget is passed through a two-stage process in Parliament. A vote on account is passed in March to enable routine spending on salaries and other regular costs for two to three months.

The finance bill, which contains tax changes, and the demands and appropriation bill, and spells out full year expenditure details, are passed in May.

The government is keen to conclude the process by March so that all spending and tax proposals can be implemented from the beginning of the new financial year.

At present, while income tax changes are effective from April 1, these are retroactively applied after the finance bill is passed in May.

Also, while Budget is presented in February, several tax proposals come into effect only after the finance bill is passed in May.

This year, for instance, the service tax was increased to 15 percent from 14 percent with effect from June 1, although the announcement was made in the budget on February 28.

However, an early Budget will mean that projections will be predicated on early national income forecasts made in January, instead of February currently.

This could be risky, because the budget estimates will effectively factor in data from nine (April-Dec) instead of nearly 11 months now (April to early February).

Change of ‘plan’

Also, the “plan”, “non-plan” expenditure classification in the Budget has been scrapped and all government spending will henceforth be listed under ‘revenue’ or ‘capital expenditure’ as may be the case.

Revenue expenditure is what the government spends on day-to-day running of departments and services, interest payments, and subsidies, while capital expenditure is funds spent on creating assets like land, machinery and projects.

Lighter Part B of Budget speech

The Centre and the states are working to meet the April 1, 2017, deadline for implementing a nationwide goods and services tax (GST).

If this deadline is met, next year’s Budget speech would have a very light ‘Part B’, the section that contains tax proposals.

Under GST, almost all indirect taxes including excise, special additional duties and service tax among others will be subsumed in the new tax structure.

The rates will be decided by the GST Council, a panel headed by the Central finance minister with state finance ministers as members.

Effectively, this would take away a significant part of the central finance minister’s discretionary authority to rule on indirect taxes.

After GST, Part B of the Union Budget speech, will have income and other direct taxes and customs duties, a major break from the past when every minor indirect tax change had market and sectoral implications.