Most folks who tuned into Budget 2019 may have come away with the impression that it was just a random bag of goodies for Indian voters from a government heading into general elections. But the tax and subsidy proposals in this Budget do offer cues to the NDA’s policy leanings. It may also be quite difficult for any new government voted into power to wriggle out of some of the populist proposals mooted in this Budget.
Reading between the lines, there were four broad hints on the policy direction that voters and investors must take away from this Budget.
No relaxing the tax net
With the NDA government making only marginal tweaks to income tax in the first five years of its term, taxpayers were primed for a doubling of the basic exemption threshold for income tax from ₹2.5 lakh to ₹5 lakh this year. But Budget 2019 has taken a rather roundabout route to extending tax breaks to low income-earners.
Instead of straightaway lifting the exemption limit to ₹5 lakh from ₹2.5 lakh, it has offered a tax rebate to citizens earning up to ₹5 lakh a year. The grant of a rebate, instead of a higher exemption limit, ensures that the tax breaks are limited only to folks whose incomes are capped at ₹5 lakh a year (or ₹6.5 lakh a year if one includes Section 80C investments). Higher income earners will continue to shell out taxes at earlier rates on their entire income.
Why do this? The use of a rebate instead of an exemption tells us that while the NDA may have developed a soft corner for low income taxpayers in election year, it remains keen to retain them in the tax net.
It has always been an uphill task for Indian governments to get more citizens to voluntarily pay income tax. In the last four years (FY14-FY18), India’s income tax return filers have miraculously shot from 3.79 crore to 6.85 crore, thanks to stronger anti-evasion measures and lightning strikes like the note ban. Having brought these new taxpayers into the net, the government is probably loath to let them slip away.
Had the basic exemption threshold for income tax been lifted to ₹5 lakh, the three crore citizens who will file returns to earn a rebate, may have stopped filing their returns, shrinking the tax base.
In future too, taxpayers should expect income tax thresholds to stay put and continued efforts to widen the tax base.
Reduced red tape
One of the biggest grouses that the aam aadmi taxpayer has had with the NDA government is that it has done no better than its predecessor in terms of tying him up in red tape. The harassment of individual taxpayers through complicated filing forms, elaborate disclosures, demand notices and scrutiny assessments has continued unchecked in the last five years.
But the 2019 Budget offers hope that the NDA has begun to pay heed to these complaints. It has now promised to process tax returns within 24 hours with quick refunds and move scrutiny assessments wholly to the electronic mode. But the Budget move that senior citizens and small savers may welcome the most is the decision to lift the threshold for TDS (tax deduction at source) on interest from bank and post office deposits from the current ₹10,000 a year to ₹40,000 a year.
This saves small savers and pensioners who fall below the taxable income limit enormous trouble, in requisitioning their banks/post offices to hold off TDS.
This is a contentious move, given that in FY18, ₹4.12 lakh crore of the ₹11.5 lakh crore gross direct tax receipts for India came in through the auto-deducted TDS. Involuntary taxpayers who shell out TDS also add sizeable numbers (nearly two crore) to the tax base showcased by the CBDT. Shrinking the TDS pie forces the taxman to put in far more legwork to meet his collection targets.
But it is a good thing that the NDA, which has been quite aggressive with its tax collection measures, has accepted this trade-off. Irrespective of who gets voted in, the aam aadmi can now expect more procedural simplifications in income tax.
Change of heart on real estate
Tax policies of governments in recent years have tried their level best to cure Indian investors of their fetish for real estate and nudge them towards financial investments. But tax proposals contained in the last couple of Budgets suggest that the NDA has been having a change of heart.
The 2019 Budget has several inconsequential-looking proposals that add up to sizeable incentives for home buyers. One, the Budget seeks to allow taxpayers relief from capital gains tax, even if they buy two residential houses (instead of one) after selling their residential property. The sum which will be exempt from capital gains tax is a liberal ₹2 crore.
Two, taxpayers will be allowed to claim ‘nil’ annual value on two self-occupied homes instead of one, when declaring income from house property. Three, real estate developers will be exempt from paying tax on ‘notional rent’ on their inventory for two years instead of one.
While the first two measures are likely to stimulate appetite for home-buying, the third will help reduce the financial burden on developers sitting on huge unsold inventory.
The promise to review GST on property is a sweetener too.
These changes come on top of the proposal to tax equity capital gains last year and a liberal Credit Linked Subsidy Scheme for home-loan takers. In effect, realisation seems to be dawning that it isn’t great policy to forcibly drive Indian households away from property-buying.
That may be bad news for financial firms, which have been riding high on the ‘financialisation of household savings’ story. But it is not so bad for the economy. The real estate sector, for all its grey areas, is a big job creator and has a significant multiplier effect.
Back to assured pensions
It has taken considerable doing for the government to move its employees away from the comfort of assured-return pension products to the market-linked National Pension System.
All government employees joining service since 2004 have been contributing to NPS, relieving the exchequer of the burden of footing a bloating pension Bill.
But by mooting a guaranteed lifelong pension of ₹3,000 a month for 10 crore unorganised sector workers earning up to ₹15,000 a month, the NDA seems to be veering back towards defined benefit pension schemes for certain sections of the population. Of course, in the absence of a social security net or unemployment benefits for India’s mammoth unorganised sector workforce, one cannot grudge disadvantaged workers this benefit.
But given that the government is offering assured returns against modest monthly contributions of ₹100, the implications for the fisc can be very significant.
Though the scheme has been flagged off with a token ₹500 crore allocation, the payments are sure to balloon over time. That’s not a comforting thought for taxpayers, given that a big chunk of the budget already goes to meeting salary and pension payouts.