If one looks back at how the middle class has been affected by successive budgets, the following points emerge. (Representational Image)
Since the pandemic, the salaried class has been affected by a combination of loss of jobs, pay cuts, high inflation, and high medical expenses. There is a serious need to treat this class more fairly
Written by Madan Sabnavis
Budgets seem to be all about providing largesse to the poor and incentives to the industry while reiterating the constraint of being fiscally prudent. Any talk of addressing the issues confronting the middle class is skipped and never quite addressed. Will this budget be any different?
The problem is that when one is neither poor nor rich, one has to fend for oneself. Most of the expenditure schemes are targeted towards the poor. There is the food subsidy or a free food programme. Farmers are given cash transfers under the PM Kisan scheme and the fertiliser subsidy also percolates to them. There is the MGNREGA which provides employment for the rural folk. There are farm loan waivers. There is also a health insurance scheme (PM Ayushman Bharat) for the poor but not one for the middle class. The discourse on these expenditures revolves around how they are populist or necessary, with the new term, revdi, catching on now.
Spending is also directed towards the industrial sector. The PLI is an example where the government gives an outright subsidy for investing and producing more. It is performance-based but directed at the capitalist. The corporate tax rate was reduced in 2019 — the effective tax rate for India Inc is now closer to 22 per cent. This is considered to be an incentive for performing better and for investing more. But its efficacy is debatable. There are resolution mechanisms in place — loan waivers, for example — to resolve the settlement of loans which industry cannot repay.
The section which has gotten left out every time is the salaried class. The salaried class is a known category. It is fully monitored and can be taxed at will. This forms an assured revenue stream for the government. The number of people in the salaried class only increases as more jobs are created. Hence the tax paid by this class also increases. Even those who retire from service are already registered with the tax authorities and continue paying taxes on income earned on interest or dividends. This does not hold for corporate tax or even customs duties. There is also no lobby group for this section unlike farmer groups or SME associations or the industry associations like CII and FICCI. In fact, even economists who pontificate on what the FM should do normally speak for the industry — never for the salaried class.
The salaried class has borne the brunt of attempts to enhance government revenue through increases in direct or indirect taxes. In fact, the withdrawal of exemptions and change in tax rules which make this class pay more tax works to the benefit of the government. After all, the entire business of budgeting is a zero-sum game where higher revenue is normally at the cost of some section as buoyancy is limited given that growth has been erratic.
If one looks back at how the middle class has been affected by successive budgets, the following points emerge.
First, interest income on deposits, which was tax free up to a limit, was withdrawn (the popular Section 80L). Second, those who invested in the famous fixed maturity plans to take advantage of the long-term capital gains suddenly realised one day that the one-year period was changed to three years. Third, those who thought equity markets were good if the instruments were held for a longer period of time have found their gains now being taxed. Fourth, dividend, which was tax-free, is now taxed in their hands with no commensurate increase in the payouts by companies. Fifth, the limits that one could invest under Section 80C have been kept unchanged for long. Sixth, interest on the National Savings Certificate which was tax-free now is taxable. Seventh, even provident funds interest above a certain level is now being taxed. Eighth, when income crosses Rs 50 lakh per annum, there is a surcharge on the entire income rather than the increase over the threshold.
The list is endless, and there is strong justification for every such change. But at the end of the day, the salaried individual ends up subsidising the nation. The government keeps lamenting that there are very few people paying taxes – around 60 million. But this cannot be a justification for taxing this set heavily every year. The government has kept the tax brackets unchanged since 2014-15 while withdrawing exemptions slice by slice. It is not surprising that when the government offered an alternative tax scheme which excluded exemptions, few showed any interest in switching.
Inflation has been increasing at an average of 6 per cent per annum over the last decade. A basic exemption limit of Rs 2.5 lakh looks incongruous in such a situation and the logical thing is for the limit to be adjusted in line with inflation. With taxable income not changing and cumulative inflation at over 50 per cent, there is a case for increasing the exemption limit to Rs 3.75 lakh.
Savings in the economy have been coming down and to induce people to get thrifty, tax incentives would be in order. The government can keep aside some part of its borrowing programme for retail investors in the form of tax-free bonds that are issued with a coupon rate of 7 per cent. Further, the limits under different sections need to be increased to keep in line with higher costs of living. The section 80C limit of Rs 1.5 lakh needs to be doubled to encourage savings. Also, the present deduction for medical insurance premium, Rs 25,000, appears to be very low given that an equivalent of the Rs 5 lakh cover under the Ayushman Bharat Scheme costs well over Rs 35,000 when privately taken.
Since the pandemic, the purchasing power of the salaried class has been affected by a combination of loss of jobs, pay cuts, high inflation, and high medical expenses. There is a serious need to treat this class more fairly and review the government’s approach to taxation.
Sabnavis is Chief Economist, Bank of Baroda and author of Lockdown or Economic Destruction? Views are personal
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