Finance Minister Jaitley will be presenting his 5th budget under Prime Minister Modi on 1st February 2018. Individuals, especially the salaried class, have high hopes from the budget. Individuals hope to get tax breaks from Jaitley, so that their net take home increases providing a cushion against low salary hikes, increasing inflation and decline in interest rates on savings.
1. India’s personal income tax rate is amongst the highest in the world. Not only this, the highest rate of 30% kicks in at much lower income levels of Rs. 10 lakhs per annum (USD 15,625 p.a. at an exchange rate of USD 1= INR 64). The comparable tax rate in the USA for similar income is less than half at 12%. In Singapore, the first USD 20,000 p.a. income attracts nil taxes. While countries in Europe have a higher tax rate than India, individuals there enjoy a host of benefits like free education, subsidized hospitalization, social security etc.
2. A change in tax slabs is the need of the hour to provide relief to individual taxpayers from the recent slowdown. GDP over the past few quarters (except last) has registered a decline, resultantly companies will be doling out lower salary hikes and bonuses. Salaries in India have been witnessing a decreasing pattern in the year-on-year increase as per Willis Towers Watson.
3. We now have a unique situation where corporates with a turnover of less than Rs. 50 crores have to pay tax at the rate of 25% while individuals with income of more than Rs. 10 lakhs have to pay tax at the rate of 30%. This has made individuals feel cheated. The increase of tax slabs will bring some sort of parity with small corporates.
4. While oil prices have declined globally, in India the fuel prices have more or less remained at same levels, as the government has raised duties to fund infrastructure projects. Change in tax slabs will also partly compensate individuals for high fuel prices.
5. With the introduction of GST, service tax rate has witnessed an increase from 15% to 18%. 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% in December 2017. With oil prices firming up at USD 70/bbl levels, inflation levels could further rise, given India is a major importer of crude oil and it plays a significant role in CPI calculation. Such a step will bring relief against the expected increase in inflation.
Critics could argue the increase in tax slabs would reduce government revenues and increase the fiscal deficit. At this juncture, the economy needs time to stabilize after revolutionary step like GST. An increase in tax slabs will leave more money in the hands of taxpayers. With this more take home, individuals will either save more or spend more.
6. A higher net take home will give a big boost to consumption, increasing demand for goods and services, which would benefit companies, which will make higher profits and pay more taxes. This would also increase GST collections and compensate for losses in direct tax collections. The increase of tax slabs thus will have a multiplier effect on Indian economy. To note, private final consumption expenditure accounts for more than half of GDP and is mainly dependent on income.
7. Politically this would also placate the middle class, which is a big and anchor voting segment with 5.3 crore households and 26.7 crore population.
Let’s see if FM Jaitley obliges….