Government budgeting exercise – focus on application of funds

Every annual Central Budget exercise, we have the familiar rhetoric of the Central Govt Finance Bureaucracy saying that Indians as individuals are not honest taxpayers. What the Finance Ministry bureaucracy needs to do is cast the net wider.

As at March 31,’24, there were 74.67 crores PAN Cards issued of which 98% were individual PAN Cards. Individual PAN Card Holders are therefore around 73 Crores in numbers. However, the Income Tax Returns filed by individuals for year 2023/24 were 8.09 crores – 11% of individual PAN Card Holders filed their income tax returns. Excluding agriculture income of large farmers is a disastrous decision for collecting individual income tax.

From the AIS reports of individuals, one can easily make out who are the persons who had income tax deducted or collected at source but did not file their income tax returns. The large value TDS / TCS individuals who have not filed income tax returns, should be the Tax Dept focus, if there is an intent to expand the income tax coverage.

An opportunity to simplify the Income Act for individuals was lost thru the Section 87A rebate amendment. Under both the old method and new method on individual income tax, the base limit could have been kept at Rs 12 lakhs and then the tables of income slabs and rates of tax could have been constructed. Why give a benefit so grudgingly, when the benefit is well deserved and overdue?

Interestingly at the Gross income Tax collection levels, non-corporate income tax payers are projected to pay more income tax than corporate tax payers. The Budget Estimate for year 2025-26 projects non-corporate tax payers to be paying Rs 14,38,000 crores of income tax against Rs 10,82,000 crores of corporate tax. This is a surprising number but as highlighted above, the non-corporate income tax collection is a half baked tax collection effort. With proper efforts in place to catch the ones who are not filing income tax returns, the estimated non-corporate income tax could double, giving great relief to income tax collector and income tax payer.

There is another source of income revenue that the Country and Finance Ministry are not focused on. The discussion is on Dividends and Profits received by the Central Government from Public sector enterprises and other bodies like Reserve Bank of India, etc. The latest Budget projects Dividends and Profits income at Rs 3,25,000 crores. In my view, this is a paltry figure.

The real value of this income can be derived by looking at the amount that the Central Govt has invested into public sector units in terms of share capital, loans and advances (often to fund the losses of Central Public sector enterprises – CPSE). For the year ended March 31, 2024 let us know what is the amount invested by the Central Govt into Central Public Sector Entities thru Share Capital, Loans and Advances. Considering that the audited accounts for year ended March 31, ’24 should be completed, the numbers should not be very difficult to compute. Against this Application of Funds, let us test the return to the Central Govt by way of ‘Dividends and Profits’. I am convinced that the % Return would be dismal.

One way of addressing the Budget shortfalls and inability to put greater investments into Defence, Infrastructure, social welfare schemes is to get adequate Returns on Government investments from CPSEs. We need to take a severe review of this source of revenue, which is always under the radar. Individual income tax is the only thing that everybody is focused on.

There is a need to focus our attention in Budgeting from Sources of Funds to Application of Funds. Divestment as an exercise is not popular and faces resistance. That is why year after year, the divestment proceeds revenue keeps dropping on the Projections side. We need to make a change in our Finance and Industry related Ministries (Shipping, Banking, Insurance, Transport, Ports, etc) thinking – for Tax payer money that is invested into Central Public Sector Enterprises (CPSEs). There needs to be a proper positive Return so that the Tax Payer tax contribution funds additional new essential activities. Tax payer contribution MUST BE managed better.

Maybe, we need something like a DOGE (USA) to really make out a new construct on public sector working, funding, efficiency computation and performance targets setting. Ministries should be responsible for CPSE units under them. Too much wastage in Central Govt programmes is tolerated and not attended to.

It is my belief after watching Investments being made in the past – that the private sector has lost it’s zest for investment. It can never be the Leader. It will always be the follower of Government investment. There are honorable promoter exceptions but very few. Most private sector promoter groups are followers and that is why we are seeing the consolidation stage in private businesses. The aggressive promoters are buying the less performing units in their business space. However, in the absence of new capacity creation, the Nation does not benefit from additional capacity creation.

The focus of the Central Govt Budget exercise should be on three issues:

1. Increase the number of individual income tax returns being filed and make the income tax law more egalitarian and applicable to all. The existing narrow individual income tax filers base will not yield enough in future;
2. Get Returns on investment made into assets (central public sector units).  This is the heart of the Budget revenue exercise to fund increased infrastructure, defence and social welfare spendings;
3. Create a Budget monitoring team such that there are no performance slippages and better costs management. 

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