Journalism of Courage
In Budget 2023-24, the government sweetened the New Tax Regime (NTR) and exhorted tax-payers to switch over from the Old Tax Regime (OTR). The Honourable Finance Minister (FM) said that her five announcements will “primarily benefit our hard working middle class.”
The FM did not define the middle class. Her government, however, has defined the economically weaker sections (EWS) and notified that families earning a gross annual income below Rs 8,00,000 would fall under EWS. It was based on a report by the Ajay Bhushan Pandey Committee. We may assume that those falling under EWS are poor.
Who is Middle Class?
Another study by PRICE (People Research on India’s Consumer Economy) found that 31 per cent of households have an annual income of between Rs 5 lakh and Rs 30 lakh and they could be classified as the middle class. That’s about 28 crore households. A household may have only agricultural income or it may consist of more than one income-earning person but not all may be income tax filers or payers. In 2017-18, the Income tax department disclosed that 1,47,54,245 persons returned an annual income of Rs 5-10 lakh and 45,08,722 persons returned an annual income of Rs 10-25 lakh. The total is about 2 crore persons. The number may have increased since.
For our purpose, we need to know how many income tax filers disclose an annual income of Rs 8 lakh to Rs 30 lakh. My rough estimate, based upon the various data points, is a maximum of 3-4 crore persons. The FM claims to have given relief to them under the sweetened NTR.
Cracking the Math
Several newspapers have published tables (on February 2) containing calculations of tax liability for different levels of income under OTR and NTR and up to what level is the OTR more beneficial.
According to The Indian Express, the OTR is more beneficial – with less tax liability – up to an income level of Rs 15 lakh. (The table stops there). The Hindu puts it at Rs 35 lakh. The Economic Times puts it at Rs 60 lakh. Other newspapers have carried similar tables. For senior citizens and super senior citizens, the OTR is markedly superior at these levels. The government has not contradicted any of these reports or tables.
I have before me an Excel Sheet prepared by a chartered accountant at Ahmedabad. It shows the salary income, standard deduction, professional tax, deductions under Sections 80C and 80D, and deduction for interest paid (Rs 2 lakh a year) on a housing loan. At every level of income up to Rs 30 lakh, the OTR is more beneficial. If the assessee has business and other income, the OTR is more beneficial up to an income level of Rs 10 lakh and the tax liability becomes equal at levels of Rs 15 lakh to Rs 30 lakh. The consensus appears to be that the OTR is more beneficial for the middle class, as defined. The government’s argument that the middle class taxpayer will pay less tax under NTR is demonstrably wrong.
Goodbye Savings?
However, the more important issue is whether, from a tax payer‘s point of view, is it prudent and beneficial if the tax payer ‘saves and spends’ or ‘only spends’. The importance of household savings in developing countries is universally acknowledged. There is little or nil social security provided by the government to the vast majority of Indians. Therefore, for 75 years, the government stressed the importance of household savings. Household savings and corporate savings are the core of private capital which can be tapped for investment. It is not natural for individuals to save; they have to be motivated to save. Hence, the government, through tax exemptions, encourages individuals (and corporates) to save in specified instruments or assets.
The BJP government has turned the prevailing philosophy on its head. The government is implying that spending is good for the country’s economy. I do not question the need for people to spend, but spending must be balanced with savings. ‘Save & Spend’ is a far better advice than ‘Spend as if there is no tomorrow.’
I have used the Ahmedabad CA’s Excel Sheet to calculate, illustratively, the savings, the tax paid and the disposable income at three levels:
Under OTR, the assessee will pay less tax and strike a balance between savings and disposable income. Under NTR, the assessee will have a larger disposable income but no savings.
The government’s intention — no longer concealed — is to move to a no-exemption regime. I believe in a ‘low-tax, few exemptions’ regime that will encourage savings and leave enough disposable income to spend. Besides, a strict no-exemption regime must have low taxes. Under Budget 2023-24, the marginal rate of tax under OTR is 42.7 per cent and under NTR it is 39 per cent. These rates expose the myth of a low-tax regime.
Thank goodness, the government has left the choice to the taxpayer, but for how long?
