Finance and Expenditure Secretary TV Somanathan believes that the old income tax regime has incentives for both saving and dis-saving.
In an interview to businessline, Somanathan spoke on a wide rage of issues, the Union Budget, the expenditure on social sector and the drop in subsidies.
The government managed to keep fiscal deficit at 6.4 per cent for FY23. Is it because of expansion of nominal budget or because of savings?
It is a combination of three factors. One, revenue was higher than budgeted. Second, the nominal GDP expanded. Third, we exercised a tight control over the revenue expenditure barring three big subsidies. If any one of these three had not happened, it would have been more difficult. But were committed to it. If the GDP had not expanded, perhaps we would have found other measures.
For FY24, we saw a reduction in subsidy for all the all three F (Fertilizer, Food and Fuel). We understand the drop in fuel, but what about fertilizer?
In case of fertilizer, the prices that we are seeing today are substantially lower. So, we have estimated a roughly 20 per cent decline in the fertilizer subsidy. It’s entirely based on expected import prices for imported fertilizer and gas prices for the domestic urea. So, it is realistic. If we were to take only today’s prices, it may be even lower than 175 but we are assuming that it may there may be some fluctuation. So, we are providing for that too.
What kind of range are you looking at?
I do not want to share. These are market sensitive things and companies and others who sell us things are also looking at this. So, I will not give that information. I find that the commercial markets are very alert and if they think that this is what we are thinking, then they plan their tenders accordingly. So, I would not like to say that.
Though you have raised the allocation of education, but there is an impression that allocation for health is down, what do you have to say?
It is not down. It is not factually correct. It is definitely up. In BE for 2022-23, it was ₹86,606 crore and for BE 2023-24, it is ₹88,956 crore.
… But RE for FY 23 is lower than BE…
RE is the ability of the department to spend. So, one of the reasons could be that some of the states have not given their counterpart funds. But it’s not a lack of budget provision. So, we always look at BE to BE (for Year-on-Year comparison) BE to RE is for the current year, but budget to budget there is an increase in the health budget. If there is cut in the RE, it is not a cut initiated due to our wanting to cut, it is a cut due to inability to expend the monies provided in respect of health. It is not an area where we targeted for cuts.
You should also remember health is very much a state function. What we give is support. When we give support, there is a counterpart funding which is expected to come. So, there are States where they have not been forthcoming with the counterpart funds, so the next installment of central fund doesn’t get released. That is one of the reasons for the shortfall (in RE).
There are two theories about the income tax regimes. One is that large number of tax filers will get benefit while the other is that savings and investment will get discouraged because people will not get any incentive...
I would agree with the first statement that many people will find it attractive. They will find it at different levels. Everyone in ₹5-7 lakh income range will shift. And above ₹7 lakh but up to ₹15 lakh income range, majority of people are expected to shift.
Why? Because many newspapers including yours have put some calculations from EY and so on. But these calculations are based on what is possible in the old regime. What is possible, may not be feasible for a particular person, especially a low paid person, say somone in the bracket of ₹7-10 lakh, which means a salary less than one lakh a month.
They have expenses also; they don’t do only saving. So, they have a family, there are school fees to be paid, there are you know monthly expenses to be made, rent is to be discharged, there may be some health costs, there is fuel for the scooter etc, etc.
With all this, they are often not able to save the theoretical amounts which are indicated in your calculations. People in those brackets are not able to exploit it fully and they end up paying a higher effective tax. So yes, we do expect many to shift. Coming to your point on savings and the incentive for savings.
The truth is our tax incentives are partly for savings, and they are partly for dis-savings. Loans and interest deduction is for dis-saving. We give money to you if you take a loan, don’t we in the income tax system? Is that a saving? No, it’s not a saving in the economy. It promotes dis-saving.
Of course, it’s a particular kind of dis-saving which is encouraged. But there are two ways of getting a house- saving and buying it or borrowing and buying it. The tax system incentivises one particular method. It gives a benefit to those who borrow against those who save.
So, what I’m trying to say is that the old system is not necessarily pro saving. It is pro various things including saving and dis-savings. In its aggregate impact, it is not necessarily pro saving. What it does is to give a privilege to certain types of saving over certain other types of saving, which the government feels should be given a privilege.
But this distorts the choices of consumers and in fact, if you leave people to make their own choices, they will make probably more informed and better choices than somebody telling you to invest in this because this particular share is covered under ELSS. So please put your money in this you will get some tax deduction at 80 CCC or whatever.
So, people often make uninformed choices based on a short-term desire to save taxes... There are pros and cons in both systems.
Above all, it’s optional. So, if people are benefited by the old, they can remain there. But at a macroeconomic level, it doesn’t necessarily incentivise or disincentivise savings, because it has incentives for both saving and dis-savings.