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GST: Government should unveil stimulus package to deal with coronavirus fallout - GST Station

GST: Government should unveil stimulus package to deal with coronavirus fallout

GST: Government should unveil stimulus package to deal with coronavirus fallout

    It would be dangerous for the government to wait any longer before announcing a large stimulus package. In my view, until a vaccine or a cure is found, we will have to handhold our economy by creating a stimulus of 10% of our gross domestic product (GDP).

    The International Monetary Fund has already declared that the world is undergoing a global recession. This recession, unlike the global financial crisis of 2008, is not a financial markets recession but a personal one, not a supply side recession but a demand destruction. People are genuinely afraid of Covid-19, and this has wreaked havoc around the world.

    It would be dangerous for the government to wait any longer before announcing a large stimulus package. In my view, until a vaccine or a cure is found, we will have to handhold our economy by creating a stimulus of 10% of our gross domestic product (GDP).

    The US announced a $2.2 trillion stimulus on a $20 trillion GDP base; Malaysia has mobilised close to 18% of its GDP. We need to spend more than $200 billion or Rs 15 lakh crore. It is essential that we start announcing measures that protect both lives and livelihood.

    Interest rates need to be reduced at least 200 basis points (2 percentage points) from current levels, with more measures to ensure that banks lend.

    It is important that government spending continues, that agrarian homes are safeguarded, migrant workers are paid, and their employers and industry are looked after as well. After all, planning for zero revenue scenarios is a stress test that almost no business can withstand. Therefore, we need to ensure that all workers are paid Rs 5,000-6,000 per month by their employers during the lockdown period, and those employers are compensated for this through their lenders and further by the government.

    For the post lockdown period, we need a complete debt restructuring package to ensure that all businesses can withstand this period of hit and restart healthy again. We need to do everything to stimulate spending both at an individual level and for their employers.

    We also need to ensure that the state governments receive their fund allocations so that they do not create a credit crunch. The states are in the frontline of public health and other services. Cutting their funding would be disastrous.

    To stimulate spending at an individual level, personal income tax rates for the `20 lakh slab and above need to drop. This was suggested by the direct tax code committee. So far, only the Rs 15 lakh and below income bracket measures have been implemented by the government.

    Most importantly, all GST rates need to be reduced by 50% in order to stimulate spending. All cesses and surcharges need to be eliminated for individual and corporate taxes. An interest-free EMI plan needs to be created for purchase of auto, domestic holidays, domestically assembled consumer goods and real estate, in addition to personal tax rebates for auto and real estate purchases.

    The economic damage that Covid-19 has already done, and will continue to do, means that we need a new deal for Indian entrepreneurs. Without supporting Indian business, both middle class jobs and labour employment will be in jeopardy.

    In the hurriedly passed last budget, our entire structure has been made pro-foreign investor. Rather than to incentivise new capital building by resident entrepreneurs, the lopsided budget provisions will make it impossible to proceed.

    I highlight three examples: The current finance bill amendment (DDT related change) results in the following scenario of effective tax rates to entrepreneurs – 48.52% (for less than Rs. 15 lakh income) to 59.41% (for more than Rs 5 crore income) – but for foreigners this rate is capped at 40% and, in fact, comes down to 25.17% if you are a rich wealth fund. This is going to result in our entrepreneurs looking for greener pastures outside. We need the effective tax rate in the hands of residents brought down so, 48.52% tax is reduced to 25% and 59.41% tax is reduced to 35%.

    Second, the exceptions in section 80M are absurd and result in tax rates for companies who are unable to re-dividend monies (before the next filing date) that they receive from their subsidiaries immediately, to pay corporate tax twice.

    This results in an effective tax rate between 67.9% -71.2% – terrible for special purpose vehicles and subsidiaries created for infrastructure assets that are critical for nationbuilding. It disincentivises them from reinvesting that money into new projects.

    Third, the real estate sector, one of India’s biggest employers, needs urgent help. Given this economic abyss, section 43CA, which states that sales of less than 10% of the circle rate price will be dealt with punitive consequences, will exacerbate the crisis by constraining developers from selling their flats at a discount. Those that don’t sell will be destroyed by section 23(5), which says that developers’ inventories will be taxed with notional rent.

    Just as it was with the Covid-19 lockdown, the longer we wait for the stimulus, the more we risk our economic future.

    Source- Economic Times.

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