Complicating the tax regime further

The new system fails to offer any major relief to individual taxpayers, while removing incentives to save and invest

February 07, 2020 01:07 am | Updated 08:05 am IST

Getty images/istockphoto

Getty images/istockphoto

As the country waited with bated breath for any signs of demand stimulation in this year’s Budget, Finance Minister Nirmala Sitharaman delivered the longest Budget speech in the history of independent India. Her weakest punch was reserved for the last round, at which point we were just happy to exhale.

Three quarters of the way into her speech, Ms. Sitharaman announced what she claimed was a move to provide significant relief to individual taxpayers by simplifying the income tax law. The relief, she said, will be in the form of lower tax rates for which individuals will have to give up on the exemptions they enjoy under the existing regime. The simplification of the income tax law, the Finance Minister said, will benefit both the assessees and the assessors.

In essence, the government decided to give a small section of taxpayers an opportunity to pocket more money, in the process hoping that they will give up on their savings instruments such as the Public Provident Fund and various life insurance products, and also abandon their investment in what in India is viewed as a safe haven asset — real estate.

The question that arises here is: Does the new tax regime really put more money into the hands of taxpayers? Taking the case of a typical taxpayer who is not a homeowner — considering that the new regime does not provide any exemption on interest on home loans — it is clear that in a majority of cases, the regime will leave the individual poorer. That said, there may be a few cases, as in the case of salaried personnel without any exposure to standard investments, where the new system might be of some benefit.

Left worse on both counts

The second part of Ms. Sitharaman’s value proposition was that the new system would provide relief to taxpayers who, she said, have struggled with a cumbersome process, with more than 100 exemptions. The Minister’s claims would have held true had the older system been discontinued altogether. Instead, what she delivered leaves taxpayers with double the amount of work — they now also have to compare the two systems and make a decision on which one is more favourable for them. Another factor complicating the taxpayers’ filing process is that it isn’t clear now which exemption will be scrapped in the near term and which one will continue in the long term. The new system, therefore, leaves taxpayers worse on both counts.

The more concerning issue with the new tax system has two elements. One, it marks a departure from a scenario where the state used direct taxes and exemptions to incentivise investment in key sectors; this the new regime does without providing an equally effective mechanism on the indirect taxation front. An example of the latter would have been an exemption on the purchase of electric vehicles, with the goal of reducing our dependence on fossil fuels. Similarly, an increase in incentive for home ownership would have provided a sagging real estate sector with some much needed fillip. It is ironic that the government, while disincentivising investment in insurance on the one hand, is also attempting to publicly sell stakes in India’s largest insurance provider on the other hand.

The second important issue with the new tax system is that it removes all incentives to save in an economy that is already seeing a steady decline in our household savings rate, fuelled by unemployment. Nobel-winning behavioural economist Richard Thaler, a favourite of Narendra Modi and who applauded the Prime Minister for his work on Swachh Bharat, has worked extensively on encouraging Americans to save for retirement. It was his research that persuaded American lawmakers to reform the retirement scheme. This change encouraged employers to enrol workers automatically for the retirement savings plan, increasing participation rates among young American workers. Our government seems to be encouraging the young taxpayers to do the opposite.

Finally, it was disappointing that the Budget gave such a disproportionate emphasis on tax reform, considering the fact that taxpayers constitute hardly 2.5% of the population. With 60% of the population engaged in agriculture and allied activities, any real demand stimulation would have had to begin with the rural sector. Hence, the low allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme and PM-KISAN was unfortunate.

Mohan Kumaramangalam is a working president of Tamil Nadu Congress Committee

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