Sorry, Budget 2016 Won’t Be About The Middle Class Tax Payer

There is a silly season and there is a budget season. Or there could be two silly seasons – one when news has dried up and a second when everyone and their uncle has a point of view on what the Finance Minister should do in the budget.www.taxxcel.com

The Finance Minister encourages these views by calling many august people to long meetings seeking the distinguished members’ thoughts. This time, Arun Jaitley has also asked the aam aadmi to tweet suggestions. So from industrialists to economists to reps of state governments, a long line of visitors all arrive in New Delhi to tell the Finance Minister how he can design a better budget – especially for them.

What nobody wants to discuss is that there is very little money available to any government to put to productive use.

This graphic (source: Budget 2015-16) of what happens to the rupee clearly demonstrates that only 11% of the budget is available for the Central Plan (or real development spending), which is Rs. 46,000 crore. The bulk of the rest of the money is drained away by interest payments (20%), subsidies (10%) defence salaries, other salaries, pensions etc. What this graphic hides is the fact that these percentages taken are on the total amount that the government spends, and not what it earns. The central collection of taxes etc only amounts to two thirds of the money it spends. The rest is borrowed.

The heart of the problem is that the government’s tax collection system is weak, and Indians are amongst the biggest tax cheats in the world. Currently, only 3% of Indians pay income tax. This is largely because income from agriculture cannot be taxed by the Central Government. So farmers don’t come into the tax net. In reality, most of the rural population manages to stay out of the tax net.

But farmers aren’t the only people who escape paying taxes. Many people under report income. So, unless you are a salaried person, in which case you get hit by the full force of taxes, you can probably fiddle the amount you earn. Which is true of most professionals, shopkeepers and businessmen. How else do you explain the difference between what the government reports and the banks’ estimate of the super-rich in India? The government says only 50,000 people declare and income of more than Rs. 1 crore. The wealth reports estimate that the Very High Net Income families in India number about 1.75 lakhs to 2.50 lakhs. That’s upto FIVE times the number that declare the Rs. 1 crore-plus income. So yes, cheating on taxes is true of the rich, but as the report below shows, you can bet under-reporting on income is rampant in all classes of people.

What this shows is in a country of 1.2 billion people, 39 lakh people (about one fourth of Delhi’s population) pay NINETY percent of all income tax. So, either India isn’t shining, or a lot of people fudge their income.

But tax cheating does not mean just not paying taxes, it also means paying less tax than you owe because you don’t show much of your income. After all, the cash you pay your doctor, lawyer and chartered accountant often does not find its way on to their books. Cash paid at shops or the “estimate” instead of the bill that the shopkeeper gives you is humbug – the money is not accounted for. Contractors of all kinds avoid taxes like the plague. All these worthies are part of the problem of a low tax yield.

So yes, the government doesn’t get its dues. The other problem is on government spending: the Holy Cows of Subsidies. Between food, fertilizer and petroleum products, a lot of money is ostensibly spent keeping the poor from deprivation. Unfortunately, much of this never reaches the real poor and is siphoned. But no government has the courage to remove these welfare schemes. The potential political fallout is too high a risk to pay in country where every year, some state or the other goes to the polls. Efforts have begun to rationalize these, as with LPG through direct transfer (the subsidy lands straight in the account of the beneficiary), and this is an area that could see more progress; the government is considering means of direct transfer for food subsidy or fertilizer.

Prime Minister Modi has already done a U-turn to now endorse MGNREGA (the rural employment scheme brought in by the Congress government); with the continuing drought in much of the country and the recent announcement of crop insurance, rural spends aren’t likely to come down. The fact that three major states going to the polls in April (followed by UP next year) portends more giveaways on February 29 to farmers.

In fact, the big debate is whether the government should increase spending by borrowing more, or remain fiscally prudent. On one side, the RBI Governor Raghuram Rajan, Niti Aayog chief Arvind Panagariya and others have warned the government against over-spending and breaking its targeted fiscal barriers. On the other hand, Chief Economic Advisor, Arvind Subramanian and others have argued that the government should not worry about spending more as it is only this which will give a kick start to the economy.

Luckily for Mr Jaitley, crude prices are likely to remain low, so you can assume that the taxes on petroleum (currently 33% of the price is excise duty), which have kept prices high, will continue or may even go up.

Service tax under the cloak of rationalizing it for GST will go up again from 14.5% to at least 16%. That means you probably will pay more at restaurants, beauty salons, and for utilities.

The average taxpayer is hoping for some relief in terms of increasing the exemption level and larger deductions for medical insurance and interest on house loans. An effort to this effect may be done as a populist measure as it really does not cost the government that much to absorb the costs of those concessions.

So while everyone wants to chat about what the Budget will bring, assume that it will firstly address the large voting public of this country.

There may be a few tidbits for the middle class, but with the government already having started the implementation of One Rank One Pension for defence personnel, and with a mammoth hike due in the wage bill for central government employees, plus meeting the Government’s rural concerns, if you’re a salaried person, don’t expect too much.

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