Budget to make sweeping recast of direct taxes: SBI Research

The Government is likely to make sweeping recast of direct taxes in the ensuing Budget to give a boost to the economy following demonetisation, says a report.

According to SBI's research report Ecowrap, the upcoming Budget is likely to see an increase in personal income tax exemption limit, increase in section 80C exemption limit, interest exemption on housing loan and and at least reducing (if not abolishing) the lock in period for bank fixed deposits.

"We expect an increase in personal income tax exemption limit from Rs 2.5 lakh to Rs 3.0 lakh, increase in section 80C exemption limit from current Rs 1.5 lakh to Rs 2 lakh, interest exemption on housing loan from Rs 2 lakh to Rs 3 lakh and at least reducing (if not abolishing) the lock in period for bank fixed deposits from 5 years to 3 years for availing tax exemption," SBI Research said in its Ecowrap report.

The report, authored by Soumya Kanti Ghosh, Chief Economic Adviser & GM, Economic Research Department, SBI noted that "such giveaways will cost Rs 35,300 crore but we expect this to be more than balanced by IDS2 revenue and cancelled note liabilities of RBI".

SBI Research expects tax collection under IDS to be around Rs 50,000 crore and cancelled liabilities from RBI to be around Rs 75,000 crore. Following the demonetisation move, the recast in direct tax moves is expected to give a boost the economy.

"The demonetisation has changed the entire gamut of the economy. The GDP growth is expected to be grow by 7.1 per cent in 2016-17 compared to 7.6 per cent growth in 2015-16," it said.

The report further noted that the challenges for the budget this year are more formidable than they were in the previous year. "There is no substitute to investment led growth as opposed to consumption led. A more prudent approach will be to select two-three high potential sectors for fiscal stimulus, agriculture being the most promising followed by SME," it said.

On the expenditure side, the SBI research report said it doesn't perceive any significant jump and hopes a marginal increase in revenue expenditure at 13.1 per cent for the financial year 2017-18 compared to fiscal 2016-17 while a modest increase of 13.3 per cent in capital expenditure.

The removal of distinction between plan and non plan expenditure will help capital expenditure to grow at a better rate in the next fiscal 2017-18, Ecowrap said.

For the financial year 2017-18, it expects a net market borrowing at Rs 4.05 lakh crore with gross borrowing at Rs 5.80 lakh crore after adjusting for net redemptions of Rs 1.75 lakh crore (adjusted for debt switch and buy back).

The SBI research report believes there is a need to raise the income tax exemption limit to Rs 3 lakh from Rs 2.5 lakh. It also expects the government to increase the exemption limit of interest payments under housing loan to Rs 2.5 lakh for existing home loan buyers also from the current level of Rs 2 lakh.

"The overall impact of such concessions will result in revenue foregone of around Rs 35,300 crore," Ecowrap said.

However, it is expecting a tax collection under Income declaration Scheme (IDS) to be around Rs 50,000 crores and cancelled liabilities from RBI to be around Rs 75,000 crore, which will still give the government a sizeable revenue surplus even after such giveaways.