Updated: October 12, 2020 4:36:27 pm
Finance Minister Nirmala Sitharaman announces plans to reactivate the economy affected by the coronavirus lockdown in New Delhi, India, on Monday, October 12, 2020. (AP)
Finance Minister Nirmala Sitharaman announced on Monday two sets of measures to generate consumer demand and boost capital spending in the economy. The measures announced by the government, together with the participation of the states and the private sector, according to the government, are projected to create an “additional demand” of Rs 1 lakh crore in the economy. Sitharaman said that supply restrictions in the economy have been eased, but consumer demand is still affected. Some proposals aim to advance spending, while others are “directly linked to the increase in GDP (Gross Domestic Product),” he said.
The LTC Cash Voucher Program is the first part of Modi Govt’s plan to stimulate consumer demand. (1/2) pic.twitter.com/V2V5UA7Jdl
– NSitharamanOffice (@nsitharamanoffc) October 12, 2020
The ministry has decided to allow government and private sector employees to use their License Travel Grant tax-free benefit for various types of purchases subject to certain conditions, while an interest-free festival advance of Rs 10,000 is given to government employees. The Center and the states have announced measures to increase capital expenditures.
How does the LTC benefit affect you?
The government announced on Monday that central government employees will receive tax benefits in the LTC component without having to travel. However, these employees would have to spend three times the LTC fee component to purchase items that attract 12 percent or more of GST. What this effectively means is that if your LTC fee component is Rs 40,000, you have to spend Rs 1.2 lakh on goods that fall by 12% or more from GST slab to save tax on Rs 40,000.
On the other hand, if you don’t spend that amount, you may be taxed based on your marginal tax rate on the LTC component. So if you fall on the 10% tax slab you will have to pay an additional tax of 4,000 rupees and if you fall on the 30% tax slab you will have to pay an additional tax of around 12,000 rupees on the amount of the LTC fee of Rs 40,000.
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Regarding the license fee component of LTC, the employee will have to spend an equivalent amount to purchase goods that attract GST of 12 percent or more.
What benefit will it bring to the economy?
Through the LTC consumption boost plan, the government expects a demand generation of Rs 28 billion in the economy. While it expects additional demand creation of around Rs 19 billion from demand from central government employees, it expects additional demand generation of another Rs 9 billion from state government employees. Furthermore, the government has said that the same benefits will be available to private sector employees if employers decide to offer the scheme to their employees and decide to take advantage of it.
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How does it benefit the government revenue?
While GST collections have been severely affected in the first half of the fiscal year due to the Covid-19 pandemic, an increase in consumption of the LTC component of the salary of central and state government employees will raise GST collections by the second half of the year under the scheme calls for expenditures to be made until March 31, 2021. If private sector employees are also involved, it can lead to a significant increase in overall consumption and an increase in GST collection.
What is the festival’s special advance program?
The government has reinstated the festival advance, which was abolished in accordance with the recommendations of the Payment Commission 7, for once until March 31, 2021. By virtue of this, all employees of the central government will get an advance without interest of Rs 10,000 that the government will recover. in 10 installments. It will be delivered in the form of a Rupay card preloaded with the anticipated value and the government expects to shell out Rs 4 billion under the plan. According to the Ministry of Finance, if all states provide a similar advance, another Rs. Rs 8 billion is likely to be disbursed. This is expected to generate consumer demand ahead of festivals like Diwali.
What are the measures to boost capex and their impact?
Special assistance will be provided to states in the form of 50-year interest-free loans of Rs 12 billion under certain conditions. The states have been classified into three groups: Group 1 has Northeast states (Rs 1,600 crore) and Uttarakhand and Himachal Pradesh (Rs 900 crore), Group 2 has other states that will get Rs 7,500 crore in proportion to their share according to Finance Commission Refund, and Group 3 has states that will get a total of Rs 2 billion if they comply with three of the four reforms, including One Nation One Ration, outlined in the government’s Atma Nirbhar package announced in early May. The funds, which must be spent by March 31, 2021, can be used by states for new and ongoing projects and to settle contractor invoices on those projects.
The funds provided to the states will be over and above their maximum borrowing limits.
For its part, the Center has proposed an additional budget of Rs 25,000 crore for capital expenditures on roads, defense infrastructure, water supply, urban development, allocations that will be made to various ministries in upcoming discussions to formulate revised estimates. Sitharaman said capital spending has “a high multiplier effect” on the economy and is expected to boost demand in various sectors of the economy.
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