Home / Opinion / Columns /  Opinion | The FM needed to go beyond just good intentions. They are not enough

A too-long budget speech that was abruptly cut short, budget proposals that disappointed markets and income tax paying Indians. A fatigue with more good intentions rather than a big push for real change. That’s the story of Budget 2020.

The 35 million Indians who bear the disproportionate burden on income tax in India were waiting to get something from this budget. The dual tax system announced by the FM looks at a lower tax regime for those who are willing to give up on the deductions and exemptions. People with incomes up to 15 lakh a year benefit if they give up on their tax breaks and pay a lower rate. The FM said that they will gain up to 78,000 a year. Though if you add the common deductions, this number changes to the negative. It gets worse for those with incomes over 15 lakh if they move to the new tax regime. According to the FM, the state is letting go of about 40,000 crore of revenue due to this—or this is the money in the hands of the people if everybody migrates to the new system. But it does not seem that everybody will move since the benefits are not clear at all. It does look like the government has not thought this proposal through and not counted all the deductions that an average household avails. Start adding the others and the move to the new tax regime is not recommended because it leaves you worse off.

The other problem is that the number of tax cuts are now 11. Seven tax slabs and then another four cuts due to the incidence of surcharge on taxes beyond incomes of 50 lakh. Instead of a simpler tax system, we’ve ended up with a horribly complicated, messy and expensive direct tax regime.

The new tax regime will also see the issue of ongoing investments in long-term products such as Public Provident Fund (PPF), equity-linked saving scheme (ELSS), life insurance, NPS and home loan principal. Investors who were using these products just for tax breaks may find it more useful to pick products that work for them rather than go for the tax break. If this was meant to be a nudge—it may actually be a good idea. The well-off Indians with dividend income have got hit with the DDT scrapping; the tax liability moves into their hands. Those in the 20% tax bracket stand to lose on DDT.

While the market was anticipating the DDT proposal, it was also waiting for some clean up on the capital gains rules across asset classes and a clue to how consumption will get a trigger to get the economy out of the current slump. But with nothing on capital gains and a nominal growth target of 10%, that could hide an inflation of 6% with growth of 4%, markets sulked on Saturday, dropping almost 1,000 points.

The mention of an Life Insurance Corp. of India (LIC) stake sale drew a sharp intake of breath across the financial sector. LIC has been a holy cow for the longest time, serving as a funder of government papers—both debt and equity—for years. Bringing an entity like LIC to the market will need its books to be opened up and the much needed transparency will come to this resistant part of the financial sector. A related announcement was the introduction of G-sec ETFs showing the government’s desire to find investors for its papers other than banks and life insurance companies. This is also good for reducing financial repression in India. We’ll have to wait for the LIC disinvestment story to unfold—do not underestimate the power of the unions and agency force.

Deposit insurance got a hike from 1 lakh to 5 lakh for banks. I would look at this as a precursor to the government reintroducing the much-needed Financial Resolution and Deposit Insurance (FRDI) Bill for putting in place an early warning system for distress in financial firms. The earlier bill was scuttled by the leftists fear-mongering on the bail-in clause in this Bill. For the taxpayers unlucky enough to be in the tax net of a country where few people pay income tax, the taxpayer charter is just words. With the disappointments of the past and this budget of Modi 2.0, taxpayers will have to see action on the ground before they feel happy.

But a small announcement on using an app-based mechanism to get loans for the MSME sector needs a closer look. Details should be announced soon, but in the budget this seems to be one of the more promising proposals. As always, expect high tech to provide the fairest, cheapest, fastest and most democratic solutions in India.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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