In the recently announced budget by the FM , one of the major changes that has happened is in the area of personal tax. The Finance minister has made major changes in the tax regime .

Primarily in the next taxation regime , the FM has made three key changes , firstly the tax slabs have been reduced to  5 , secondly tax rebate has been increased to 7 lacs from 5 lacs in the new regime , thirdly the max tax rate has been changed from 42 % to 30.5% ( surcharge ) . This is basically done to increase the disposable income for the middle class , because we are in the recessionary environment , there is not much happening as far as private sector investment is concerned to boost GDP, so other way is to increased consumption , which requires fiscal impetus.  Remember the equation to find the GDP in economics 101. 

GDP = C+ I + G + Net Exports

In the above equation  private investment I is not expected to grow much , so consumption C and the government spending  G are other two other ways to boost GDP . 

But , it needs to be seen  as to how many people are using and will be using the new tax regime, it was introduced in 2020 and we have not seen a lot of movement to new tax regime. 

What does it mean by new taxation systems as default ?

Whatever changes are going be in taxation will be happening in the new tax regime , it is a kind of signalling that the government wants people to shift to new tax regime , in a nutshell the government wants people to move to a scheme which is devoid of all tax exemptions and deductions. It is a move towards simplification . For people earning upto 7 lacs in the old tax regime were anyways not paying any taxes, because upto 5 lacs there was rebate and above that there was exemptions like 80C , 80 CCD etc. So, now the new scheme and old scheme is on parity , but nothing much has changed for that section of tax payers.

However , the tax rates in the new tax regime are lower than the old  tax regime , with the option of standard deduction , so people who are in the lower segment of income , might move to the new tax regime , but people who have home loans or parked their savings in the tax savings instruments might stick with the old tax regime only , because these exemptions and deduction are there too for people who have relatively high disposable income .

So, there are lots of considerations , it depends on what kind of income levels you are in , and what kinds of portfolio you need. If you wants to park your savings in the equities , then move to new system else stay put in the old one. 

 

 

Does the new tax regime remove incentive to save money ?

So, the new systems clearly doesn’t want you to save your money in PPF , NPS , buy insurance etc , so it is clearly not that favourable if you consider the change of habits going forward , when it comes to parking your money .It will not incentivised people to save in tax savings instruments , it will be dampener to household savings . The indication is that the disincentive towards sections 80 C is clearly visible . All the shares of insurance, and financial services have fallen since the budget was announced . 

 

Government has missed the bus when it comes to increasing the 80 C limit from 1.5 lacs ?

So , clearly the government wants you to move to new tax system , so  yes the kind of saving instruments that one might use will change . There will be substitution that will happen, so savings overall might not take a hit , it just might be diversified from tax savings to other alternate investment instruments .

 

Will the new Tax system lead to significant consumption ?

People who are at the lower end of the tax slabs , there will be mild push in the level of consumption. So this is welcomed considering the macro situations like high Debt to GDP ratio , Fiscal consolidation etc . If the government would not have given boost then it would have led to complete fiscal deficit , rise in interest payments etc . They have reduced the surcharge on rich tax payers, since a lot of HNIs are fleeing the country to other tax havens .  

 

High Capital expenditure of government ?

 

This is third year where the government has increase capital exp , in terms of gross fixed capital ratio to government spending has risen, this would led to private investments too. The budget for next year’s 10 lac crores for capex , the last year target has also been met as per economic survey . 

The government is also giving incentives to the states to spend on capital expenditure by offering 50 years interest free loans amounting to 1.3 lac crores. On the allocation front the government has done well, even the railways have done well , spending will be almost 2.5 lac crores .

 

 

Is there anything good happening while we are spending so much on creating infra in the country ?

 

We can see that the industrial corridors are getting set up In different parts of the country , we are seeing investment summits being organised by different states, we have seen employment figures improving . But a lot of this also depends on external factors too, like what’s happening in the global markets. 

 

 

What has not gone right in this budget ?

The disinvestment targets have been revised and in-fact slashed from last year , one of the main plans of policy been the strategic divestments . The FM in her previous budgets mentioned about privatisation of public sector banks, there was no talks on privatisation initiatives in the coming year or is the government thinking of privatisation at all , In These things there was no clarity . 

 

So, over all the government through its new tax changes have initiated consumption to increase / boost the economy and also will be spending more on the capital expenditure than last years, which is much needed engine growth until private sector expenditure picks up . The fiscal consolidation road map has been stuck too, the revenue and expenditure estimates are also on conservative side, BUT there is no plans how to achieve the disinvestment targets , there hasn’t been any action on this area until now . We had the national monetisation pipeline launched but apart from roads no other government assets could be monetised 

 

Written By: Ankur Kushwaha, Sr. Consultant, Invest Punjab | Govt. of Punjab.

DISCLAIMER: Views expressed are personal.