With the electoral battle hotting up, the commentariat has been showering the Modi government with ideas on what it can do to woo back the disgruntled voter in its upcoming Budget. Many of these ideas involve giving fiscal prudence and long-term considerations the short shrift and being generous with the giveaways.
But here are four Budget ideas that can strike a balance between pleasing the aam aadmi and doing the economy and the fisc some good in the long run.
Tinker with rates, not slabs
Life has not been easy for the individual taxpayer in the last five years, as the Modi government hasn’t granted any material relaxations on income tax.
In FY14, the basic income threshold up to which one paid no tax, was ₹2 lakh a year. Five years later, in FY19 it is still at ₹2.50 lakh. In five years, the tax rate for the lowest income bracket has been slashed from 10 to 5 per cent, but the rates for higher slabs have remained untouched.
There’s now a demand for the FM to lift the basic exemption limit for income tax from ₹2.5 lakh to ₹5 lakh. While taxpayers would no doubt be overjoyed at such a move, the problem is that it would deal a big blow to India’s direct tax base.
It has taken a lot of coaxing, cajoling and shock-and-awe tactics such as demonetisation, to get India’s income tax return filers up from 3.79 crore in FY14 to 6.85 crore in FY18. Data from the income tax department tell us that roughly 66 per cent of the return filers in assessment year 2017-18 fell in the less than ₹5 lakh income bracket. So, should the basic exemption threshold be lifted to ₹5 lakh, nearly two-thirds of the current return filers may flee the tax net.
These taxpayers currently make a small contribution to the tax kitty. But then, as majority of Indian households make an annual income of less than ₹5 lakh, the country has no choice but to net such small fish, to expand its tax base. The SEC Census in 2011 found that in rural India, over 91 per cent of the rural households saw their bread-winner earn less than ₹1.2 lakh a year. A 2016 Labour Bureau survey covering 1.5 lakh households found that 87 per cent of them had an annual income of less than ₹2.4 lakh.
It is for this reason that the 2016 Economic Survey made a persuasive case for India to not tinker with its tax slabs. To quote: “One low-hanging fruit that we suggested was to refrain from raising exemption thresholds and allowing natural growth in income to increase the number of taxpayers. This would be reform through inaction.”
Such inaction will disappoint many. But in the long run, a wider tax base is India’s only hope at pruning its high direct and indirect tax rates. Right now, the government can consider marginally reducing tax rates in the 20 and 30 per cent slabs to encourage better compliance.
Many salary or business income earners do not really mind paying their taxes, provided they are not required to deal with complicated filings or have run-ins with the taxman. CBDT statistics tell us that there were over 2 crore income tax payers in AY18 who shelled out TDS but did not file a return. Simplifying the compliance burden can provide material relief to taxpayers without the government having to give up on its tax collections.
Exempting super-senior citizens over 80 from filing IT returns, offering free filing services to first-timers/low-income earners and offering auto-filled forms to salaried taxpayers, are possible measures to lighten the compliance burden. Doing away with scrutiny assessments for salaried taxpayers and refraining from demand notices for tax dues below a certain threshold, will spell big relief too.
Do away with DDT
Stock market participants are clamouring for a waiver on the long-term capital gains tax (LTCG) on equities, arguing that this will be a big boost to sentiment. But letting equity investments off the hook when fixed income returns are taxed at the highest slab rate, would be iniquitous to small savers.
Instead, the Budget can look to do away with dividend distribution tax (DDT) on equities. Both the 20 per cent DDT on payouts by companies/MFs at source, and the 10 per cent tax on big investors receiving dividends of over ₹10 lakh a year, need to go. These amount to double and triple taxation, as companies distribute dividends only from tax-paid profits. Dividend taxes also prompt companies generating high cash flows or selling their assets to either hoard the cash or use unfriendly routes such as buybacks.
If DDT is waived, payouts of surpluses from companies to their shareholders will rise. Small investors may either reinvest the money or spend it, both of which will be good for the economy.
Promoters of India Inc may redeploy the higher dividends in new ventures, enabling the free flow of capital from companies that don’t have use for it to those that badly need it. This could provide a small kicker to stalled private investments in the economy.
Support farm income, with data
There’s little doubt that India’s agricultural sector is today in dire need of support, given deflating food prices, ineffectual MSPs and a procurement machinery that is in shambles. Replacing the plethora of food and agri-input subsidies with flat income support for farmers, is a sound idea.
But given that there were 16.6 crore persons engaged in agriculture and allied activities (Census 2011), income support to all the folk associated with the farm economy can empty out the exchequer. Input subsidies and loan waivers given away on anecdotal evidence of distress, have been prone to leakages and cornering by middlemen and affluent land-owners, leaving landless labourers and small farmers high and dry.
The lack of granular data on land holdings, tenancy agreements and realisations-versus-costs for farming households has proved a big impediment to well-targeted agri support schemes.
A shift to a universal income support scheme offers an excellent one-time opportunity for the government to seek granular data on India’s farming households. Making a bank account, a basic return statement (of income, expenses and land holdings) and eventually a PAN card mandatory for farmers to avail themselves of income support, can help verify that the benefit is flowing to the intended beneficiary.
It can also help the government put together a comprehensive database on the income and wealth distribution of India’s farm sector. This will be a valuable baby step towards sweeping rich farmers into the income tax net in the long run.