JULY 08, 2019 News the Newsbehind 35
indianeconomicpanorama, founder of Nishith Desai Associates.
Shefali Goradia, partner, Deloitte
India, concurred but said that for
large companies, India will remain less
competitive as the total eff ective tax rate,
including the dividend distribution tax,
is as high as 48.31%. “In comparison,
China has a 25% rate, with a 10 to 20%
rate for small scale enterprises, while
US off ers 21% rate. Singapore is even
lower at 17%.”
The government defended
move, saying this will cover 99.3%
of companies. “From a numerical
perspective, this is signifi cant--the cut is
targeted towards medium enterprises,”
said Ganesh Raj, national tax policy
leader, EY. “Th e philosophy seems to
be common in personal income tax and
corporate tax. Bigger companies will
need to contribute more just as the rich
have to pay more tax.”
Th e sweetener for large fi rms is the
tax incentive – an investment-linked
deduction for large manufacturing
companies that invest in electronics and
other advances technology areas. Here
the government has not gone by the size
of the company.
SURPRISE REACTION OF
MARKETS
Th e Budget has not really been well
received by the stock market, with the
Sensex trading weak, down around
394 points Friday. Th is is surprising,
according to Lokeshwarri writing in
the Business Line, since this is the fi rst
Modi Budget where the capital market
has been given a lot of attention. Th e
proposal to increase public shareholding
from 25 to 35 per cent appears aimed
at increasing liquidity in the stock
market and the proposal to increase
the statutory limit for foreign portfolio
investors from 24 per cent to the
sectoral foreign investment limit, and
merging the NRI and FPI limits is also
aimed at allowing more money to fl ow
into the equity market.
The tweak to the SecuritiesTransaction Tax is an attempt at
ironing out an anomaly. Currently, in
option contracts that are exercised, the
purchaser has to pay STT at 0.125 per
cent of the settlement price. In case
the option is not exercised, the seller
has to pay STT at the rate of 0.05 per
cent on the option premium. Since the
settlement price is typically many times
the option premium, the higher STT
levy was a dis-incentivising exercising
of options, leading to price distortions
closer to settlement.
Th e Budget is now proposing to
levy Securities Transaction Tax (STT)
on the price diff erential between the
settlement and strike price in case of
exercise of options. Th is would remove
the anomaly that currently exists in
taxing options.
While the move to increase the
public shareholding will improve
market liquidity in the long-term, if the
proposal is implemented, there could be
a rush by promoters to sell their shares
to meet the requirement, which can lead
to some short-term sell-off.
Allowing higher FPI investments
in companies also needs to be thought
through since excessive foreign
investment is not a good idea in many
sectors.EXPERT ANALYSES
ECONOMIC SURVEY 2018-19:
“BLUE SKY THINKING”
Guided by the dictum of “blue
sky thinking” - uninhibited approach
to achieve goals - the Economic
Survey 2018-19 Th ursday laid out the
ambitious agenda of applying principles
of behavioural economics to achieve 8
per cent of sustained GDP growth to
make India a USD 5-trillion economy
by 2024-25.
In his preface to the Survey, Chief
Economic Adviser (CEA) KrishnamurthyV Subramanian said “Th e Survey adopts
an unfettered approach in thinking
about the appropriate economic model
for India......” It “departs from
traditional thinking by viewing the
economy as being either in a virtuous
or a vicious cycle, and thus never in
equilibrium. Rather than viewing
the national priorities of fostering
economic growth, demand, exports
and job creation as separate problems,
the Survey views these macroeconomic
phenomena as complementary to each
other,” Subramanian said.
BEHAVIOURAL ECONOMICS
PROVIDES THE NECESSARY
TOOLS
Significantly, the CEA said
behavioural economics provides the
necessary tools and principles to not
only understand how norms affect
behaviour but also to utilise these
norms to eff ect behavioural change.
“The Survey, therefore, lays out an
ambitious agenda for behavioural
change by applying the principles of
behavioural economics to several issues
including gender equality, a healthy and
beautiful India, savings, tax compliance
and credit quality,” he said.
But the survey acknowledges that
“Behavioural economics is, however, not
a panacea to policymaking; its potential
needs to be understood and put in
perspective. Nudge policies cannot and
should not supplant every incentive-
based and mandate-based policy. For
example, a policy that merely nudges
people to refrain from assaulting others
will fail as such situations warrant strict
decree or, at least, a stronger push than
a mere nudge. However, the majority
of public policy issues are amenable to
incorporating nudges. In fact, many
incentive and mandate-based policies
may be clubbed with a nudge eff ect to
increase their effi cacy.”
The survey further suggests that
religious norms can also be used to
further the cause of tax compliance. In