Budget Expectations: What the Indian common man expects?

24 Jan 2024 , 09:57 AM

SO, WHAT IS IN IT FOR ME?

The beauty of understanding the aspirations of the common man with reference to the budget is that, it begins with the question, “what is in it for me”? This makes the demands of the common man extremely sharp and focused. They want clear deliverables in the budget and no finance minister can really afford to ignore their aspirations. Individually, they may be a microcosm of Indian society, but collectively, they are extremely powerful; economically, socially, and politically. The common man’s demands from the Union Budget tend to be largely reasonable. 

They need an economy that is growing and prices that are stable, such that household budgets do not go for a toss. They want to be left with a surplus after paying taxes and they want to put this surplus to good use. That is the context of what the common man expected from the Union Budget. Generally, elections used to be a time to pander to the common man, but that is no longer possible with the model code of conduct in place. Also, the current government in the last 10 years, has eschewed the temptation to offer freebies to please people. That has also made expectations reasonable.

1. HELP ME SAVE SOME TAXES PLEASE

Let us face it, Budget 2024-25 presented on February 01, 2024, will be an interim budget. The full budget will only be presented in July after the new government is in place post the general elections. It is not yet clear if the finance minister will go the whole hog or just present a stop-gap budget. Irrespective of when the actual announcements come out, here is what the common man expects in terms of reducing their tax burden.

• Effective FY24, the modified new tax regime (NTR) has become the default tax regime. However, one objection is that the peak rate of tax still remains at 30% for individuals. That is rather unfair since companies that give up all exemptions pay just 15% peak tax rate. In the interest of parity, the Budget must consider bringing down the peak rate of taxation to 15% and then the removal of exemptions really makes sense.

   

• There have been demands that the new tax regime has maintained peak rates of tax at 30%, but have cut out all exemptions. In case, the government plans to retain the peak rates of tax at 30% in the NTR, it can extend some critical exemptions to the NTR like Section 80D for medical insurance, full home benefits, HRA benefits etc. Currently, only the standard deduction benefit is available under the NTR.

   

• Indian tax payers have become very active in the equity markets, either directly or through mutual funds. Either ways, they end up paying peak rates of taxes on dividends earned on equities, equity funds and debt funds. In most cases, the dividend is a post-tax appropriation by the company or fund and hence taxing it is already double taxation in the hands of the investor. This impact can be mitigated by reducing the rate of tax.

   

• While investors are generally ok with the taxation of short term capital gains, the main problem is with the long term capital gains. These are currently taxed at 10% flat (without indexation benefits) above the threshold of Rs1 lakh per annum. There are two problems here. When investors do SIPs for long periods, at redemption they end up paying flat 10% on the gains, which his bulk of the corpus. The idea is to make long term gains on equity above 5 years fully tax free. The other option is to increase the base exemption limit from Rs1 lakh to Rs3 lakhs per annum to make it more substantive.

There would be challenges of the applicability of the moral code of conduct, but that should not hinder a genuine attempt to ease the burden on the common man.

1. TWEAKING TAX SLABS AND STANDARD DEDUCTION

The tax slabs need to reflect the changing purchasing power in the Indian economy, but that does not appear to be the case. The peak taxation threshold for 30% tax is Rs10 lakhs in the old tax regime and Rs15 lakhs in the updated new tax regime. That is still too low and the budget must consider raising this limit to around Rs20 lakh for the old tax regime and the new tax regime. Also, the peak rate of 30% (much higher for higher income groups) has to be brought in tandem with peak tax rate of 15% for corporates under the new tax regime. 

One of the learnings for India in the last 20 years has been that the Laffer Curve argument actually works in the Indian context. When tax rates are cut, it improves compliance and actually increases the tax revenues on a net basis. This has been the experience with corporate taxes and should apply to personal taxes. For the government, that is a risk worth taking in the Union Budget 2024-25, considering its larger than life implications for the vast Indian middle class. 

The other change called for is raising the rate of standard deduction. It may be recollected that standard deduction was removed in 2005, but was subsequently reintroduced in the 2018 Union Budget. However, the level of standard deduction has remained static at Rs50,000 for five years. It is time to raise the standard deduction limit to, at least Rs1,00,000 in the Indian context. Since standard deduction benefit is available to salaried employees and pensioners on the old tax regime and new tax regime, raising the level of standard deduction will certainly have a magnifying effect on consumption, and probably even enhance the savings for people.

1. DIVORCE KEY EXEMPTIONS FROM OTR AND NTR

Today there are several important exemptions for the common man that have gone out along with the shift to the new tax regime. For instance, when you opt for the new tax regime (NTR), you lose out the exemptions like house rent allowance (HRA), leave travel allowance and deductions for professional tax paid. Secondly, key sections like Section 80C and 80D are not applicable and Section 24 is only applicable for let out property and not for self-occupied property under the NTR. Obviously, a person has planned out finances has a lot to lose in the NTR. What the NTR can do is to retain basic exemptions. Here is how.

Instead of looking at specific sections, the budget can look to identify critical items for tax exemption from a long term tax perspective. Section 24 for self-occupied property is a must, and in the absence of that it will keep lower and middle income groups from owning homes. Secondly, health insurance is not a choice, but a necessity today. The budget must look to retain the benefits of health cover in the new tax regime too. Thirdly, key investments like ELSS mutual funds, ULIPs and life insurance must still be retained, although NPS and CPF can be limited to exemptions on employer contribution only. 

1. RETHINK DEDUCTION LEVELS UNDER THE OLD TAX REGIME

The people who remain in the old tax regime are the ones who have the ability to make best of bigger exemptions. Many of the tax exemptions have not been reviewed for a long time and many of these numbers are out of sync with reality. For instance, the Section 80C limit of Rs1.50 lakhs was last reviewed in 2015. The old tax regime (OTR) can boost this limit to Rs2.50 lakhs. Similarly, the Section 24 benefit in the old tax regime for self-occupied property is still at Rs2 lakhs, which is largely out of sync with the property prices. This can be raised to Rs5 lakhs to make it more meaningful and encourage a big shift in housing demand. Similarly, the deduction under Section 80D for Medical Insurance can be at a base level of Rs1 lakh, with or without senior citizens. This will enable people to take larger cover.

Should the enhanced limits also apply to the new tax regime (NTR) as outlined in the third point. That may not be necessary since the rates of tax are lower in the NTR. What the Budget 2024-25 can do is to retail the old limit for selected exemptions and bring it back to the NTR. For the OTR, the expanded limits can apply. It would certainly result in some revenue loss, but that is likely to be more temporary in nature. The overall gains of higher consumption and higher investments would outweigh the short term costs to the exchequer. Once again, for Budget 2024-25, this is a risk worth taking. 

1. PROCEDURAL CHANGES THAT THE BUDGET 2024-25 CAN INITIATE

Taxation in India is not just about the rules and regulations but also about the process. Here are some important tweaks that the Budget 2024-25 can make to make life easier.

• Tax refunds have become a lot quicker today that in the old days and such refunds are now entirely electronic. However, there are still several refund cases that are stuck for years due to procedural and technical issues. In such cases, the CBDT must allow the tax filer to adjust part of the refund against the tax payable in the next year. It can specify slabs for technical issues and refund size issues.

   

• Enabling international OTP for tax filing verification. Once the returns are filed, they need to be e-verified with an OTP, which comes as an SMS on the mobile. This does not support international numbers or Indian numbers when travelling on international roaming. The CBDT can enable this or, possibly, use alternate methods like emails or IVR authentication to complete the verification from anywhere.

   

• The Annual Information Statement (AIS), which is part of your secured tax access area has a wealth of information. However, if some more items are included in the AIR (where PAN mapping is being done), then the automated filling of tax forms becomes a lot simpler. While collected taxes, bank interest, dividends, sale and purchase of capital assets, foreign remittance etc are already captured in AIS, it can also add other PAN-based transactions to the AIS like Employer Provident Fund, Public Provident Fund, National Pension Scheme, life, and health insurance policies, as well as principal and interest on home loan repayment.

   

• Entrepreneurship is the new buzzword among the young and the tech savvy. Today, there are score of people who are branching out on their own, giving up cushy jobs. However, many of them tend to get caught up in procedural issues. The presumptive tax scheme is a great boon to such small businesses since they can use this scheme up to an annual turnover limit of Rs3 crore under Section 44AD. These businesses can just show a presumptive 6% of turnover as income and file returns accordingly, with no audit required. The only condition is that 95% of the turnover should be through banking channels, failing which the presumed income will be 8%. However, this is not aligned with the GST registration requirements, which is mandatory for any business with turnover up Rs50 lakhs and more. It is essential to align the GST limit also to Rs3 crore to make this entire exercise meaningful.

The common man always has an endless set of demand and the government will have to eventually work out how much of that is feasible. However, in a tough year, the hope is that the Union Budget 2024-25 takes some serious steps towards pampering the common man!