Union Budget 2023: What Modi Govt's New Tax Regime Has In Store, Gain Or Pain?

Reduced consumer (indirect) taxes could further help in at least increasing disposable income of most under tax base

Image: Aroop Mishra/The Quint

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The Union Budget speech of Finance Minister Nirmala Sitharaman highlighted seven key priority goals as the “Saptarishis guiding through the Amrit Kaal” for this year’s fiscal outlay map:

a) Inclusive Development; b) Last Mile Development; c) Infrastructure and Investment; d) Green Growth; e) Youth, and f) Financial Sector.

Key fiscal numbers were kept in line with the broader market expectations with the fiscal deficit revised to 5.9% of GDP (the FM added that the Union government remains committed to bringing the fiscal deficit down to 4.5 per cent of the GDP by 2025-26);

Gross borrowing levels kept at 15.43 trillion rupees (which is still very high); a net tax revenue rise seen at around 11% (though the source for a difference of 4 lakhs crore in the presented tax and non-tax revenue collection outlay will need to be accessed, given how badly the government has done on its disinvestment targets so far), and the overall government expenditure driven by a higher outlay for government Capex and railways, is up about 7% of GDP.

On personal income tax, incentives assigned in terms of tax rate deductions and rebate announcements are broadly to encourage average middle-class taxpayers (who actually pay more tax annually than the corporate class in India) to subsequently move towards adopting the ‘new tax regime’.

A few details on revised tax slab details are shared below. Further, lowering of the surcharge on the super rich (those earning Rs 5 crore or more a year) such that the effective tax rate is lowered from 42.7 per cent to 39 per cent, is done with the hope to immediately incentivise the super rich to shift to the new tax regime.

Revised tax slabs by Modi govt

Image: Vibhuhita Singh/The Quint

On a macro-review of key announcements made, this appears to be a ‘no-gain-no-pain’ budget. Here, I limit my observations to analysing the likely implications of the personal income tax rate revisions announced (as per the new tax regime) for this fiscal year.

On personal income tax revisions

Based on the revisions done in the new tax regime, the macro-middle class, which in the Indian scenario, can be sub-categorized into: low-income middle class, middle class, and upper-middle class, may marginally benefit to save on tax, subscribing to the new tax regime.

For someone earning Rs 9,00,000 per year, (s)he will now need to pay roughly Rs 45,000 as tax instead of Rs 60,000 from the previous tax slab rates. The overall rebate or the no-tax exemption limit has also been increased from Rs 5 lakhs to 7 lakhs, which will enable more low-income earners to not pay tax.

Principally, a (marginal) tax rate break announced to the middle class was desperately needed for two reasons. One, given high inflation (driven by food prices and fuel costs), and a sustained low income/wage growth level seen across middle class (plus, low-income) sections from much before the pandemic, the broader ‘middle class’ group in India, over the last few years, was being squeezed into spending more while also paying a higher tax rate on increased earnings.

Even a marginal tax rate deduction will help in increasing their disposable income and discretionary spending/saving level. This is vital for increasing household savings, which have been declining over the last decade, and in terms of increasing aggregate low-income consumption demand (which has been a concern since year 2016 at least).

But, given the margin of tax-break provided through revisions, the government doesn’t go too far in addressing the concerns raised above in context to the low income-middle class. Moreover, the skewed nature of indirect-direct tax regime in India, regressively impacts the average low-income consumer in India, who pays the same tax on essentials as the rich.

The indirect taxes/GDP ratio increased to 11% from lows of 8.8% in FY10, more recently through the increase in taxes on fuel and broad basing GST to even basic consumption items. This significantly reversed the convergence between indirect and direct tax incidence during the period of FY09-FY10, which saw a sharp decline in indirect tax rates and a spectacular gain in tax buoyancy led by higher direct tax incidence (See Exhibit 43-45 below sourced from here).

The indirect taxes/GDP ratio and in FY10 and its effects on rates

Image: Vibhushita Singh/The Quint 

Also, the private income tax rate for the salaried class (despite the revisions announced today) are still likely to be on average much higher than what the corporate class pays in aggregate. The mandate to do more on this was there today.

Even though the new private income tax regime may see more registrants, it may do little to transform the indirect tax reliant, pro-corporate tax regime in India.

The evidence of this is cited in a recent policy study, which argues “The (Indian) policy structure was woven around resurrecting the banking sector and corporate balance sheet, b) fiscal conservatism including limiting revenue expenditure and higher capital outlays, c) enable low-interest rates and d) ensure accommodative finance conditions. Private capex was encouraged through lower corporate tax incidence (2.9% of GDP) translating into a decline in the ratio of direct tax/GDP to 5.4% from the post- liberalization peak of 7.3% in FY08.”

The Figure below highlights the massive gap in the overall rates of taxation on ‘personal incomes’ vs. ‘corporate income’.

Overall rates of taxation on ‘personal incomes’ vs. ‘corporate income’.

Image: Vibhushita Singh/The Quint 

Is Modi Govt's Tax Policy Biased Towards The Rich & Elite?

The Finance Minister today, announced a lowering of the surcharge on the super rich (those earning Rs 5 crore or more a year) such that the effective tax rate is lowered from 42.7 per cent to 39 per cent.

Given the high rate on the inequality that is rising between the ultra-rich and the middle, low income class, and the high rate of government borrowing, one has to ask the question: Why has the Modi Government continued to pivot its fiscal policy in a year before the election, towards the ‘pro-corporate’, ‘super rich’ elite?

As argued before, most pro-business and pro-corporate measures haven’t yielded positive growth or investment gains in the last few years. And for those wondering whether being ‘pro-corporate’ in tax policy works to a government’s advantage, some context here might help. Corporate tax cuts, in a broader sense, provide a sugar-rush to an economy. Investors feel happy, albeit more temporally in the short term, buying more stocks, which puts a smile on the faces of stock traders and India’s financial markets. Others will invest majorly in greater capital-intensive modes of production, which may drive nominal growth rates for a period, but hardly do much to boost employment or create higher wage-paying opportunities.

Was there more room for 'tax reform'?

As emphasised earlier, in terms of a few tangible fiscal measures, say on the fiscal tax side, a reduction in consumer (indirect) taxes could further help in at least increasing the disposable income of most under the tax base. Slight tinkering with direct tax rates helps only marginally, but more can be done in the near future to bring out the ‘indirect tax cost’ burden on the low-income and middle class.

It may also give a much-needed fiscal space for the low-income class to save-spend more on discretion, given how much this income group has struggled through subsequent cycles of high inflation and pandemic-induced misery.

Additionally, to create more fiscal revenue for enhanced government spending needs, especially in the social (and welfare) section (where the Modi Government has done worse), the government could have considered the introduction of a ‘consumption tax’ on the top 1% wealth endowed consumption group.

Such a tax isn’t only needed for concerns of distributive equity (from the rising gap between the rich and poor, or the squeezing of the middle class) but more importantly, the revenue from such a tax will help the government to remain fiscally prudent.

It would help create a more robust fiscal revenue option(s) on the direct tax end, subsequently reducing its ‘excessive spending-dependence’ on increased government borrowing.

(The author is Associate Professor of Economics, OP Jindal Global University. He is currently Visiting Professor, Department of Economics, Carleton University. He tweets @Deepanshu_1810. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)