Stung by the suit-boot-ki-sarkar jibe and wanting to distance itself from allegations of crony capitalism, levied ironically by those who wrote the manual on it, the Narendra Modi government used every subsequent budget to display its socialist face. In its attempt to get the rich to pay for the poor, the government has gone on increasing the burden on direct taxes on the relatively well-off Indians.
We asked our Budget 2020 knowledge partner EY to run some numbers for us on taxes that different income levels paid 10 years ago and what they pay today. The numbers tell their own story. Taxes at the bottom of the income slab have reduced; the person with ₹5 lakh of gross income used to pay around ₹22,000 as tax in FY11 but today goes tax-free. Those earning ₹12 lakh are better off by about 36% and pay just under ₹65,000 less in personal income taxes in a year. But start going up the income ladder and the taxes rise hugely. At an annual income of ₹55 lakh, you pay an additional 6% tax, at an income of ₹1.5 crore, you pay an additional 14% and at ₹6 crore annual income, you pay a huge 38% more tax.
Promising to be the elephant that accepts a few mounds of rice from a small paddy field when given voluntarily, rather than come in and trample the entire field in the quest for that paddy, finance minister Nirmala Sitharaman sounded the trumpet call on tax evasion. This was bad news for the super rich in India who earn more than ₹2 crore as they will pay much more tax than before due to the new surcharge. This is certainly more than just a few mounds of rice and is going to impact both consumption and savings by this category of people. This is clearly an eat-the-rich budget. No change in rates, slabs or deductions for the rest of the people.
Ask any average middle class person what they want from the Budget and the answer is lower prices and less tax. In a way these are contradictory goals because lower tax rates could mean a revenue shortfall. A tax revenue shortfall can cause a government to borrow more, causing the deficit to increase and that could cause a price rise. Didn’t make the link? Let me try and unpack this. The annual budget presentation is a financial statement of the central government where the collection of revenues and its spending is laid out. The government gets most of its revenue from taxes (both direct and indirect) and about one-fifth from non-tax sources. Direct taxes are paid by companies and individuals under various heads (income tax, tax on house property, tax on profits and so on). Of the total revenue, income tax on non corporates (that means us) is about one-fifth of the total revenue for the year. Corporations pay a bit more than we pay. Almost half of the revenue comes from indirect taxes—it used to be excise and sales tax, but now this revenue comes through goods and services tax (GST). The shortfall in revenue over what has to be spent is called a “deficit”. This deficit gets funded largely through the money the government borrows.
There were few happy faces in India after the Budget speech got over, except for the senior citizens. Since we don’t have representatives of Bharat in the TV studios or as talking heads, their reaction does not get captured. Budget 2019 has given a big push to Bharat and tightened India a bit more. Senior citizens should be happy. The morning laughing club should be laughing harder tomorrow. They have reason to because they are possibly the only middle India cohort that gets to take home more money. Interest income for them will be exempt from tax up to Rs 50,000, up from Rs 10,000. This means that if a 60-plus person had an income of, say, Rs 10 lakh as interest, she will now be taxed on R s9.5 lakh, other exemptions and deductions remaining the same. The deduction on premiums on health insurance is up from Rs 30,000 to Rs 50,000. This is good because privately bought health covers for senior citizens are very expensive. The Pradhan Mantri Vaya Vandana Yojana has been extended till March 2020, and the Rs 7.5 lakh-limit is doubled. A 60-plus person can now get an assured 8.3% annual return on Rs 15 lakh of investment. A couple that has invested Rs 30 lakh, can earn an interest of Rs 2.49 lakh a year from it.
Finance minister Arun Jaitley announced in the Lok Sabha on Tuesday that he will roll back the tax on salaried Middle India’s one true friend—the Employees’ Provident Fund (EPF). The Budget had proposed to tax 60% of the EPF corpus on retirement, leaving 40% tax-free. But if the 60% was invested in an annuity, it would remain tax-free; the tax will be paid on the income the annuity generates. The National Pension System (NPS) has retained tax-free status for 40% of its corpus. You can take 60% of your NPS corpus as a lump sum at age 60 and 40% must go to buy an annuity. Of the total NPS corpus, 40% will now be tax-free and you will pay slab rate tax on 20% of the corpus. If your NPS corpus is Rs.100, then your tax is on Rs.20. The annuity income is taxed at slab rate.
Despite the budget-day hysteria, in which there has been an increasing focus on the household and its reaction to the event, the average Indian home has very little to do with the annual expenditure and revenue statement of the government, also known as The Budget.
I also think that attention has been focused on the wrong part of the budget speech, as far as the household is concerned. The part that gets the most attention is the one that deals with the revenue side of the budget, where the focus is on income tax. We worry about tax slabs, exemption limits and tax rates. But there has been no big change for the last 14 years in the marginal rate of income tax that has stayed at 30%. The only changes have been more of a tinkering in the form of a cess here, a surcharge there, of differential tax thresholds for men, women, or the introduction of a “very senior citizen” category in the last budget (this one still baffles me).