Union Finance Minister Nirmala Sitharaman will be presenting Modi 3.0's first budget on July 23. Already, there has been much debate about whether it will bring anything new to the table. The middle class, in particular, has a lot of expectations, especially for the reduction of taxes and initiating reforms to simplify the taxation process.
The Importance Of The Middle Class
India's middle class constitutes around 31% of the total population at present, and its share continues to rise. Notably, a majority of voters from this section have supported the Bharatiya Janata Party (BJP) since its formation. In fact, of late, this class has played the role of kingmaker, providing parties with that extra push to cross the halfway mark. In 2004, for instance, when the turnout of the middle class had declined by 18%, the Atal Bihari Vajpayee government was served a shocking defeat. In the recently concluded general election, as much as 35% of the middle class backed the BJP-led National Democratic Alliance (NDA) - three percentage points lower than 2019. At the same time, the Congress's vote share among this class increased by two percentage points since the last election.
At Rs. 10 lakh crore, the middle class accounts for a majority of the individual income tax collection of the government. Also, not more than 3% of the population pays taxes - mostly comprising the middle class - and it's these people who carry the whole of the tax burden on their shoulders. The value of personal income tax collected is more than corporate taxes. That is, the middle class is paying more taxes than all corporates put together, and it's this class the government relies on to fund its capex and welfare programmes. This is untenable in the long run for a middle-income country like India with a per capita income of just around $2,500.
Relief Long Due
Not very long ago, in the financial year 2010-11, corporate tax collections had been twice as much as personal income tax. The two became almost equal a decade later, in FY2022-23. Since then, personal income tax collections have been budgeted to be higher than corporate taxes. But while the corporate sector was given a big tax relief in the FY 2019-20 budget with a tax rate cut from 30% to 22%, personal income tax has seen no such changes since 2012-13. Deductions have not changed for years, and haven't even been adjusted for inflation. The Centre introduced a new tax regime with higher slabs in FY 2020-21, but it had no provisions for new deductions.
The middle class in India does not have any social security, except for when one has a government job. Most education and health facilities are not free, and state-run hospitals and schools often lack quality. The middle class is getting restless, and many have begun questioning what they are getting in return for the hefty taxes they pay. Corruption and freebie politics have only exacerbated these concerns.
India's Tax Structure
India's tax structures also differ from other countries. In Singapore, for example, there is no TDS (Tax Deducted at Source) on salary income. A taxpayer get 12 months after the assessment to pay taxes. Also, the first 20,000 SGD (Rs. 12.4 lakh at the current exchange rate) is exempt from taxation.
Then there is the issue of tax slabs. The highest tax bracket of 30% in India kicks in at much lower incomes. In China, in contrast, the 30% tax rate kicks in at 4,20,000 CNY, more than Rs. 48 lakh as per the current exchange rate. In Russia, all income is taxed at 13%, less than half our peak rate. In the US, income above Rs 10 lakh and up to Rs 39 lakh is taxed at just 12% for a single filer.
India on the other hand has a unique situation where individual income of above Rs. 15 lakh in the new tax regime and above Rs. 10 lakh in the old tax regime is taxed at 30%. Meanwhile, corporate income to the tune of crores is subject to just 22% tax, that too after the deduction of expenses. Further, while corporates are taxed on profit (after deducting expenses from incomes), individuals are taxed on income (salaries, professional fees, etc), without any deductions available for expenses incurred to earn income under the new tax regime.
Boosting Consumption
At a time when consumption has been lagging, it's important that the middle class is encouraged to unleash its animal spirits. Not only income tax, the middle class is a big contributor to India's GST collection too, given that it consumes a bulk of the goods and services.
The NDA government should thus keep the middle class happy, especially as four states go to polls later this year. This class expects substantial relief, not mere cosmetic changes It remains to be seen how the Finance Minister will navigate this tight fiscal position.
(Amitabh Tiwari is a political strategist and commentator. In his earlier avatar, he was a corporate and investment banker.)
Disclaimer: These are the personal opinions of the author