The Challenge of Resource Mobilisation

With the Union Budget set to be announced shortly, the Finance Minister is faced with the challenge of determining additional avenues for mobilisation of financial resources to support the government’s ambitious infrastructure development and growth targets. Over the past few years, the government has explored various sources of generating revenue to supplement the limited fiscal resources available. Apart from the taxation route, an assessment of non-tax revenues of the government shows a significant rise from 2.7 per cent of GDP in 2014-15 to 5.1 per cent of GDP in 2020-21.

Non-tax revenue generation methods by unlocking investment value of public sector assets to generate capital has been institutionalised through the National Monetisation Pipeline. This programme aims to aggregate the monetisation potential of ₹6 lakh crore through core assets of the central government over FY2022-25. As identified by the government, the road, railways, power, oil & gas and telecom sectors appear to be amenable to generating large revenue through asset monetisation. Initial success of this drive has been witnessed with NHAI raising ₹17,000 crore through the toll-operate-transfer mode over the past two years. However, these are still early days.

Having surpassed two waves of the pandemic, and in the midst of the third wave, the case for government intervention to spearhead economic recovery continues to remain very strong. Since around 15 per cent of India’s GDP comes from government expenditure, providing state governments with funds to spend is critical for recovery, as state expenditure has a high impact on sustained economic activity. Both the Centre and the states need to explore additional means to bridge revenue shortfall, in line with their current strategies.

Disinvestment and Asset Monetisation

While disinvestment is a reasonable measure to tide over the revenue shortfall that both the central and state governments are facing, as per the central government, disinvestment of only eight PSUs has been completed from amongst the 36 PSUs selected in 2016. The central government pegged its disinvestment target at `1.75 lakh crore for FY22, over five times what it raised in FY21. While it missed its previous year target by a significant margin in the backdrop of the pandemic, efforts to realise its current year target as much as possible are underway.

There are significant amounts of non-core assets that the government is looking to monetise. According to the NITI Aayog, assets close to about `90,000 crore can be leveraged to generate revenue for the government:

• Unused assets in the aviation sector: ₹15,000 crore

• Non-core assets in power sector: ₹20,000 crore

• Transportation assets—railways, roads, shipping—₹55,000 crore

The government also intends to establish the National Land Monetisation Corporation to monetise state-owned surplus land assets.

Various public sector undertakings have a lot of under- or un-utilised assets that could be monetised in innovative ways. The Centre may consider incentivising states to monetise these assets in an attempt to generate financial resources. Some of the key sectors under the control of state governments that are amenable to monetisation include:

• Tourism: Land assets and properties in enviable tourist locations

• State mineral resources: Value addition possibilities

• State highways: Toll charges

• Transport: Bus station modernisation, ads on tickets, seats, etc.

• Municipal corporations: Re-assessing rentals of leased properties; monetising buildings and land

For revenue-producing assets in the future, an SPV model for debt-equity raising can be considered. For example, un-utilised land tracts could be put to effective use without the need to sell them. This can fundamentally transform the rate and speed of growth by reimagining the way assets are monetised.

Asset monetisation can help both the Centre and states unlock real value in the economy.

Tax Rationalisation

Over the past few years, the government has undertaken various tax reforms and process simplification measures. Such tax reforms, including reduction in corporate tax rates, giving legal sanctity to the taxpayer charter, use of technology to ensure frictionless interaction for assessments and appeals, introduction of Vivad Se Vishwas (VSV) scheme, etc. have considerably improved India’s image as a tax-friendly jurisdiction. That apart, the GST regime has also witnessed changes on the law and policy front, as well as automation of compliances. These reforms, providing ‘tax certainty’ and ‘ease of doing business’, should eventually lead to increase in tax collections for the government and reduce fiscal deficit.

Taxation of Big Tech

India was an early mover in introducing unilateral measures to tax non-resident digital companies. In 2016, India introduced a digital tax in the form of Equalisation Levy on online advertisements, which was later expanded to cover online sale of goods and provision of services. In the next couple of years, with implementation of OECD Pillar One proposals, the taxation world would witness a complete overhaul of global tax norms. Pillar One implementation would ensure reallocation of a share of profits of the digital companies to the jurisdictions where its users are located. While India expects to garner greater taxation rights over the overseas digital companies’ profits, it may have to withdraw the Equalisation Levy provisions currently in vogue.

Rationalising GST Rates

The government may consider revisiting GST slabs of products in the 28 per cent category, which may only be reserved for purchases that are unhealthy, environmentally harmful and represent extreme luxury. Taxation on aspirational purchases such as consumer durables could be kept in the 18 per cent or lower GST slab. Even for products considered as extreme luxury, elasticity of consumer purchase preferences should be central to determining their GST rate.

The government may also re-assess GST slabs based on maturity of sectors. There are sectors that are predominantly still in the unorganised mode (such as house interior works), and where scope for GST compliance is low, both from consumer and supplier sides. Governments may consider reducing the GST slab for such sectors to 5 per cent to encourage inclusion in the tax net.

Tapping into healthier revenue generation avenues at central and state levels will create the fiscal space for the government to ramp up infrastructure spend and development.

The author is Partner and Head–Government & Public Services, KPMG in India