India’s Economic Woes: Why Modi Govt Couldn’t ‘Save’ Amid Lockdown

During lockdown, did Modi govt lose an opportunity with regard to daily travel and conveyance?

The efficacy of successive lockdowns during the pandemic has been argued extensively, only to be concluded as a ‘necessary evil’. While social distancing became a compulsion during the successive lockdowns – and indeed, it continue to be mandated given that the COVID-19 pandemic is still raging on – working from home has now become part of the ‘new normal’.

A laptop and a stable internet connection is enough for most service sector jobs, which, as we are learning, can be almost entirely function virtually. Thus, most such employees did not have to use transport – private or public – to reach their service destinations during the lockdown, when most offices had a clear Work From Home policy.

Clearly, this – fewer vehicles on the road – helped the physical environment around us, as studied by a group of researchers from the University of Surrey, who showed that the lockdown reduced concentrations of fine particulate matter in the air – from a 10 percent reduction in Mumbai up to a 54 percent reduction in Delhi.

However, was there an opportunity cost – and an opportunity ‘lost’ by the government with regard to daily travel and conveyance?

Only About 1% Of India’s Population Contributes To Govt’s Tax Kitty

Prior to 31 March 2018, an employee could claim tax exemption for his transport allowance to meet the expenditure incurred due to commuting from home to office and back, without even furnishing any proof of expenditure, under Section 10 (14) of The Income Tax Act,1961, read with Rule 2BB of Income Tax rules. The maximum transport allowance that could be claimed amounted to Rs 1600 per month or Rs 19,200 per annum. However, the Finance Act 2018 removed this specific exemption and merged it with medical exemption, calling it a standard deduction of Rs 40,000, which was further raised to Rs 50,000 in the Interim Budget 2019.

Thus, even though the exclusive transportation allowance was removed, it remained a part of the standard deduction, with a relatively larger proportion.

It is expected that when an employee files returns in the next financial year, he will get the tax exemption against the standard deduction of Rs 50,000. However, with most offices remaining closed except the emergency services during the lockdown months of April, May and June, is the travelling allowance exemption justified?

Before passing judgements on the justification, it is important to understand how much the government might have lost or could have earned. Only around 5.78 crore individuals filed returns, disclosing their income in the financial year of 2018-19, and 1.46 crore individual taxpayers were liable to pay income tax. Thus, around 1.1 percent of India’s total population actually contributed to India’s tax kitty, and around 4.3 percent of the population who filed their tax returns might actually claim the transport allowance.

Can Direct Taxes Help Losses Made Through Indirect Tax Collection?

So, if we take the pre-Finance Act 2018 allowance of Rs 1600 per month, an honest income earner – who has filed his tax returns – might have cost around Rs 27,744 crore (5.78 X 1600 X 3 months of lockdown) to the government kitty. The mammoth amount is around 40 percent of India’s health budget as of 2020-21.

Further, when the states in India have been left high and dry owing to around 29 percent drop in GST collections and are in urgent need of compensation, can direct taxes earned at the Central-level come to the rescue of losses in indirect tax collection through GST?

At this point, economists would argue that the individual’s finances have been hit badly after the pandemic with several experiencing pay cuts and many more losing their jobs. The Keynesian viewpoint would be that taxing the individual would adversely affect the already depleted demand side of the economy, which would further hurt India’s growth prospects.

In this respect, it is important to point out that close to 95 percent of the total population do not file tax returns in India and are expected to have a relatively modest amount of savings, especially in times such as these.

Only Way Social Welfare Can Improve Is When ‘Gainers’ Compensate The ‘Losers’

Further, job losses and business operations shutting down during the lockdowns has severely affected the informal sector. This is where economists like Kaldor and Hicks have been instrumental in putting forward the criterion of ‘compensation principle’ to evaluate the changes in social welfare resulting from any economic reallocation of resources – that which which harms one and benefits others.

The principle posits that if a change in economic policy makes some people better off and some worse off, then the only way social welfare can improve is when the gainers compensate the losers and yet keep the gainers better off.

While this principle has often been talked about in the context of a public good, it holds true even for the cause of public responsibility and ethics. The travel allowance gained by individuals is one such luxury that employees have availed of without any use of transport during the lockdown days. Either based on humanitarian grounds or on pure taxation logic, it is advisable for the latently-benefitted individuals to support the extremely beleaguered sections of the society. After all, one lesson that the pandemic has taught us is that there is plenty of room to ‘tax’ selfishness and ‘subsidise’ selflessness.

(Himadri Shekhar Chakrabarty is a Phd student in Economics at IIM-Calcutta. He tweets @HelloHimadri. This is an opinion piece and the views expressed in this article are that of the writer’s own. The Quint neither endorses nor is responsible for the same.)