Hey readers, this is a post directed at understanding the tax structure and the tax reforms of the Union Budget. It’s best to look at all the pointers and systematically break it down for better analysis. It’s better to have informed opinion on the subject. Of course, there are a lot of other macro areas in the budget like agriculture, finance, defence, education, etc. which are equally important, if not more. It is these sectors which outlay the vision of the budget and economic planning. There are some remarkable, forward-looking ideas put forward in all these sectors. Those will be taken up later on. Meanwhile, let’s get crackin’ on this one. Of course we shall consider both the microeconomic and macroeconomic perspectives of taxation.
TAXATION
This is the sector which many of us, the salaried class as well as the corporates and private entrepreneurs were eagerly waiting for – Tax Reforms. Coming from a stint in Dubai – where there are no absolutely no taxes on income – back to India where taxation is a part of life, you can’t help but talk about it.
Highlights
| 1. Abolition of Wealth Tax. | |
| 2. Additional 2% surcharge for the super-rich with income of over Rs. 1 crore. | |
| 3. Rate of corporate tax to be reduced to 25% over next four years. | |
| 4. No change in tax slabs. | |
| 5. Total exemption of up to Rs. 444200 can be achieved. | |
| 6. 100% exemption for contribution to Swachch Bharat, apart from CSR. | |
| 7. Service tax increased to14 per cent. |
There has been no change in the tax slabs which means the following table stays as it is:
| Income tax slab (in Rs.) | Tax |
| 0 to 2,50,000 | No tax |
| 2,50,001 to 5,00,000 | 10% |
| 5,00,001 to 10,00,000 | 20% |
| Above 10,00,000 | 30% |
This table, for all its worth, is the concern of middle classes alone. There’s a unique set of neo-rich middle class in India who are mostly working in corporates/government jobs and are salaried. They get salaries to the tune of 10-12 lakhs per annum after a few years in job/service. This is an aspirational class and in the age group of 30-40 and has a young family to take care of. This class feels 30% slab is a bit too high for their quality of life aspirations. They feel they’re shortchanged by this progressive taxation which clubs all beyond 10 lacs in the same bracket. In short, no increase in the lower limits of tax slabs.
Another point worth noting, which is already mentioned in various Finance Commission reports is the need to broad-base tax collection. This is the need of the hour. For a country with a population of 1.25 billion, the tax base is only 3%. This comes to around 37.5 million paying taxes in toto. This is absolutely ridiculous. What kind of economic justice do we have in this country? This is unfair to those who’re shelling out their hard-earned income, which would primarily comprise of the salaried class. This may not be a matter of the budget, but it is a serious policy matter which the government has to pursue and find a logical end to.
One of the biggest talking points of the combined Opposition in the Parliament all day long has been the deduction in corporate tax and the abolition of wealth tax, leading them to term the budget, opportunistically, a “pro-Corporate” budget. What the combined Opposition doesn’t want to look at is this is the first step in undoing much of dilatory stand of the previous dispensation and this is but a step in that direction. Deduction in corporate tax couldn’t have been better explained than by the ASEAN standards. ASEAN countries like Malaysia, Singapore, etc. are our direct competitors when it comes to greenfield investments and starting up a business. These countries have corporate tax to the tune of 21%, India reduced it from 30% to 25%. Incentivizing the corporates is seen as a long term strategy and not crony capitalism. If you do not make the climate conducive for proliferation of business, you’ll keep having sluggish growth. India needs growth engines for the ambition it has set itself. Remember, India’s Ease-of-doing-business rank is 142 globally (via World Bank). Our goal is to breach the top 50 mark!
Now comes the issue of Service tax which kept twitter buzzing all day. Yes, I was rather unimpressed initially. The tax rate of 12.36% had been hiked to 14%. This meant an increase in the tax paid for the services availed, be it a restaurant, movie theatre, bowling alley, mobile bills, etc. Yes, this indirectly falls on the end consumer. But there’s a bigger problem than the rate hike, per se. This is in the system and tax billing.
Take the case of a restaurant. Suppose the bill comes upto 1000 bucks. There’s a service charge of 10%, i.e., 100 bucks. Now the service tax is charged on 40% of the gross bill including service charge. Therefore, at 14% service tax, effective service tax added would be: 40% of 14% of 1100 bucks = 56 bucks. Instead, the restaurants charge service tax on 100% of 1100 bucks, and therefore there’s a discrepancy in the final bill amount. This has to be legally sorted, so that people are not taken for a ride. Therefore, more than the service tax hike, I’m flustered as to how this obscenity is still going on. At the same time, I’m not denying the fact that an increase in service tax would further impact the purchase points of the urban consumer and hurt their pockets and eventually the money flow in the economy. Although, I’d concede to the argument that limiting money flow tames inflation in the long run.
For the middle class, there are exemptions of Rs444200 as has been mentioned above. These are specifically in allowances like travel, etc., which are but an annual addition of 19k to the previous year’s budget. Also, social schemes like pension scheme, etc. have been proposed, but the fact is that disposable income and affordability are the 2 criteria which drive the middle class. Therefore, this budget has a bit to be desired as far as the middle class is concerned
Finally, the case of 2% surcharge for the ‘super-rich’ with an income above 1cr. Now this is one of the cases of previously mentioned narrow tax base. Not that it is genuinely a narrow base but also that it becomes narrower because of the tax-avoidance and tax-evasion as well as the underestimation of accounts of the super-rich. This tax collection has been far below potential.
Tax sleuths in India need to have a better database management system to keep track of the super-rich and not allow them to slip. Last year a mere 42800 admitted to a wealth of 1cr or more. This would be a farce in today’s time when Delhi, Mumbai each would have more number of crorepatis. This year they’re expecting 7000cr out of this, but the moot point is that the tax net shouldn’t catch only a few. Let there be no evaders.
Now this is something I wholeheartedly appreciate – 100% exemption on initiatives on Swachch Bharat. Cleanliness and sanitation as a matter of principle should be imbibed in every Indian and incentivized all the same.
As far as the idea of taxes being business-friendly is concerned, I’d totally understand and give it a go. But what the government has to remember is that if the corporate is the engine, the rungs of middle class form the bulk of the passenger lot, with due respect to the other classes. So you gotta balance it out. Efficient engines shouldn’t mean overpriced seats. This is as far as the taxation policy is concerned; the pudding, however, lies in many of the other sectors.
astronomick 