Budget must give the middle-class a leg-up

Tapati Ghose/MS Mani | Updated on January 28, 2021

Rationalisation of tax rates and slabs, and increasing the health insurance threshold will give relief to cash-strapped individuals

Budget 2021 expectations, through the lens of an individual, centres around having more cash in the hand, enabling higher savings, investment and expenditure and revival of the economy to boost equity and debt markets. Measures centred around these will help recoup losses and bring relief to cash-strapped individuals, both being the fallout of the pandemic.

The government may consider increasing the basic exemption limit from the current ₹2.5 lakh. Alternatively, the rebate which is now available to those earning up to ₹5 lakh could be upped to ₹7.5 lakh. This will put more disposable funds in the hands of the mid-income group.

The current threshold for deduction under Section 80C of ₹1.5 lakh has been in place since FY15. Considering the inflation over the last five years, there is a good case for the limit to be increased. The government could consider reinstating Section 80CCF that was introduced for infra bonds for two years, way back in 2010. These measures would be strong levers for boosting the economy. People have understood the dire need for medical insurance and preventive health check-up. The government should consider increasing the threshold for health insurance of ₹25,000 for non-senior citizens (which currently includes ₹5,000 for preventive health check-up) to at least ₹50,000.

The government may consider reducing the existing GST rate of 18 per cent on health insurance as well.

House property relief

The last Budget had introduced a simplified tax regime with lower rates to provide relief to taxpayers who opted for a simpler approach of not utilising the deductions/exemptions. It is expected that if the loss from house property is allowed to be set-off with other income, it would encourage more individuals to opt for the simplified tax regime.

Alternatively, for individuals opting for the normal tax regime, the limit for loss under the head house property for setting-off with other income should be increased considering the higher interest cost in initial years of a housing loan.

Currently, long-term capital gains arising from sale of listed securities over ₹1 lakh are taxable at a flat rate of 10 per cent, without indexation. This causes hardship to long-term investors as they are taxed on gains without considering the impact of inflation. It is expected that the rate of long-term capital gains will either reduced or the threshold increased to promote further capital infusion into the equity market by small retail investors.

While there is significant concern overall on the revenue collection numbers covering both direct and indirect taxes, there is also much concern on Customs duty collections, as these constitute a significant portion of Central government finances. There has undeniably been a reduction in the import of goods, which forms the base for Customs duty collections, on account of the overall reduction in global trade during the initial period of the pandemic-induced lockdowns in various countries.

In addition, the government is focussed on the Atmanirbhar Bharat scheme and has provided various incentives for domestic manufacture. This would also have contributed to the reduction in the import of finished goods.

While the government has taken several steps to improve the procedures associated with import of goods into India, there are some hurdles that businesses continue to face such as submitting individual clearance documents for each package imported for e-commerce purposes, necessity to pay duties on damaged and expired goods in duty-free shops in airports, etc. Similarly, there is a need to exclude Free of Cost (FoC) shipments from the Import Data Processing and Monitoring System (IDPMS) as tax payment demands/enquiries invariably get triggered on such supplies.

While the government has focussed on import duty rationalisation during the past few years, there is a need to rationalise rates further to broadly provide a scheme to tax raw materials, intermediate goods and finished goods. All raw materials, and specially those that are used for manufacturing products that are exported, should be taxed at low rates; similarly, intermediaries which are used for further manufacture and export should be taxed higher than the raw material rates but lower than the finished products rate. In many cases, this principle has not been adhered to leading to challenges for domestic manufacturers and exporters.

There is also an issue of high Customs duties on certain products which encourages customs evasion and smuggling activities. The Customs duties on gold is 12.5 per cent, while that on cut and polished gemstones is 7.5 per cent. Since these are high value products, there would be a tendency to look for avenues to avoid or reduce duty payment.

The Budget changes should, therefore, focus on improving the ease of doing business by further simplification of the import procedures, tariff rationalisation where necessary and avoiding high rates of import duties.

Ghose is Partner, and Mani is

Senior Director, Deloitte India

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Published on January 28, 2021
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