Finance Minister Arun Jaitley will be presenting his fifth Budget under Prime Minister Modi on 1 February 2018. Individuals, especially the salaried class, professionals, and senior citizens, have high hopes from the Budget. Individuals hope Jaitley will increase tax slabs / brackets, thus reducing tax liability and increasing their net take home. This will provide a cushion against low salary hikes, increasing inflation, and decline in interest rates on savings.
1. Normalisation & Parity With Global Tax Rates
India’s personal income tax rate is among the highest in the world. Not only this, the highest rate of 30 percent kicks in at much lower income levels of Rs 10 lakh per annum (US $15,625 pa at an exchange rate of $1= Rs 64). The comparable tax rate in the US for a similar income is less than half at 12 percent. In Singapore, the first US $20,000 income attracts no taxes. While countries in Europe have a higher tax rate than India, individuals there enjoy a host of benefits like free education, subsidised hospitalisation, social security, etc, which isn’t the case in India.
2. Relief From Slowdown in Economy
A change in tax slab is the need of the hour to provide relief to individual taxpayers from the recent slowdown. The GDP over the past few quarters (except the last) has registered a decline; resultantly companies will be doling out lower salary hikes and bonuses this year. Salaries in India have been witnessing a decrease in the year-on-year increase, according to Willis Towers Watson. Many employees have been laid off across sectors due to the slowdown.
3. Parity With Small Corporates
We now have a unique situation where corporates with a turnover of less than Rs 50 crore have to pay tax at the rate of 25 percent, while individuals with income of more than Rs 10 lakh have to pay 30 percent tax. This makes individuals feel cheated. Did they vote the Bharatiya Janata Party (BJP) in power for this treatment? The increase of tax slabs will bring some sort of parity with small corporates.
4. Compensation for High Fuel Prices
While global crude oil prices have declined, in India, the fuel prices have more or less remained the same as the government has raised duties to fund infrastructure and other welfare projects. When Modi took oath in May 2014, the price for a litre of petrol in Mumbai was Rs 80. On 27 January 2018, it was Rs 80.5 a litre. Change in tax slabs will also partly compensate individuals for high fuel prices.
5. Compensation for Increase in Cost of Living
With the introduction of the goods and services tax (GST), service tax rate has witnessed an increase from 15 percent to 18 percent. This has increased the cost of services like telecom, insurance, travel, etc. Increase in tax slabs will also partly compensate individuals for an increase in the cost of services/living.
Retail inflation has been rising for the past few months and was at 5.21 percent in December 2017. With oil prices firming up at US $70/bbl levels (three-year high), inflation levels could further rise, given that India is a major importer of crude oil and it has a significant weight in CPI calculation. Such a step will bring relief to people against the expected increase in inflation. As per the recent India Today Mood of the Nation poll, 23 percent respondents feel price rise has been the biggest failure of Modi; this would also partly soothe these unhappy souls.
Critics could argue that increase in tax slabs would lead to a decline in government revenues and resultantly increase the fiscal deficit.
At this juncture, the economy needs time to stabilise after revolutionary steps like demonetisation and the GST, they argue.
6. Provide a Boost to Consumption
An increase in tax slabs will leave taxpayers with more money. With more take home amount, individuals will either save more or spend more. A higher net take home will give a big boost to consumption, increasing demand for goods and services, which would benefit companies. These companies will, in turn, make more money and pay more taxes. This would also increase GST collections and compensate the government for losses in direct tax collections.
The increase in tax slab will also have a multiplier effect on the Indian economy. To note, private final consumption expenditure accounts for more than half of GDP and is mainly dependent on income.
7. Placate Middle-Class and Reap Electoral Benefits
Politically, this would also placate the middle-class, which is a big vote bank for the BJP. Economists estimate India's middle-class to be between 10 percent and 30 percent – so anywhere between 13 crore to 39 crore. NCAER projected that the Indian middle-class constitutes 5.3 crore households and 26.7 crore population by 2016.
Thirty-two percent middle-class voters supported the BJP in 2014 Lok Sabha elections, 10 percent higher compared to 2009. Support for the Congress fell from 29 percent in 2009 to 20 percent in 2014. The middle-class is an important vote bank because they vote in large numbers. In 2009 and 2014, turnout of the middle-class was the highest among all classes at 60 percent and 69 percent, 2 percent higher than the national average.
Individuals reeling under negative impacts of demonetisation, rising prices and overall slowdown in economy need big relief from Jaitley. Let’s see if the Finance Minister obliges, given the pressures he has with respect to balancing growth and maintaining fiscal discipline.
(Amitabh Tiwari is a corporate and investment banker turned political commentator, strategist and consultant. He can be reached @politicalbaaba. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same)
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