Will Budget 2024 Vie for Eyeballs or Aim for Mindshare?
The Union Budget to be presented on 23rd July is perceived to have more salience than the last few that preceded it. 
 
It is the first Budget in the third successive term of nearly the identical political formation, a phenomenon unseen in many decades.
 
Also, it would be the seventh (including the interim one in February 2024) successive one to be presented by the current finance minister (FM), a rare distinction in the modern era when the average tenure of ministries/ ministers tended to be quite brief.
 
It is also a fact that the economic growth in the recent successive quarters has exceeded expectations, despite the muted performance of most other major economies, making the occasion more material to unveil proposals that may help accelerate the present trend.
 
The five previous full Budgets from 2019-20 to 2023-24 seem to have been widely welcomed among the media, the think tanks and the industry association. 
 
A glimpse of the headlines that described the earlier few Budgets is given in the box above for reminiscences. 
 
The various constituencies that met the FM before the Budget seem to have placed their assorted demands for consideration. 
 
A few, as quoted in the press, are shown in the panel on the side.
 
One among those is the ask to rationalise the personal tax structure.
 
It is important to annotate the fact that since the advent of goods & sales tax (GST), the taxation part of the Union Budget has changed dramatically in content and centrality. 
 
In the pre-GST era, the more critical component of the Budget that caused a shock or a surprise to the business community and the stock market was the changes in indirect taxes. 
 
Changes in indirect taxes, especially excise duty, tended to have a much greater effect on the economics of doing business than changes in the income-tax structure. 
 
The indirect tax changes also took effect immediately on the day following the Budget and, thereby, its shock effect was more pronounced.
 
With GST having just celebrated its seventh chequered anniversary, the Budgets of recent years have lacked the drama that tax professionals and industry experts were witness to in the previous era.
 
The change in the scenario is also reflected in the ask of the industry associations which historically was predominantly for reduction or increase in duties depending on what helped a particular industry or business.
 
The media, that is missing the pre-Budget excitement that prevailed in the past, is doing its best to build some suspense and substance around this exercise which should ideally be done in a transparent and participative way than cooked secretly in the chambers of the North Block that become inaccessible for a few weeks preceding the budget day. 
 
Since it is only income tax that is left to be tampered with in the Union Budget, and one of the suggestions from the industry bodies is rationalisation (a euphemism often for exemption) of the personal tax structure for income up to Rs20 lakh, the present article looks at how personal taxes have been performing in the recent years for which some data is available.
 
 
 The table above captures the evolution of the personal tax rates over the years from the fiscal year 2004 till date.
 
There are separate thresholds for senior and super senior citizens but the basic rate structure is as given in this table.
 
The present rate structure has evolved in a complicated manner in the recent few years due to a plethora of surcharge rates. The rate band that jumps from 5% to 20% is also an oddity.
 
While the rate structure may appear quite static since fiscal year 2014 with little change in the threshold, the feature of a flat tax rebate under Section 87A for income up to Rs7 lakh and a new tax scheme with rates as shown below has provided adequate relief for taxpayers at lower levels of income. 
 
 
But the more critical part is to examine how broad-based the revenue gathered from personal taxes is, when the overall direct tax revenue has not moved sufficiently in tandem with the higher gross domestic product (GDP) growth of the economy.
 
The direct tax to GDP ratio has reached a figure of 6.5% only in 2023-24; it last reached such a level in 2007-8 when it was 6.2%. 
 
The tax revenue has not kept in tune with the overall economic growth, and the exercise of demonetisation, admittedly to weed out the black money, and the introduction of GST, designed to improve the formalisation of the economy, has failed to resonate in the overall tax collection figures.
 
The table below represents the total universe of individual tax filers as per the data provided by the income-tax department. 
 
 
The number does not disappoint in absolute terms but, when broken down into sub-components of taxpayers at different levels of income, the true limitations of the country’s tax base are exposed. 
 
A preponderant proportion of the population paying tax is earning taxable income below Rs10 lakh only. 
 
The scheme that allows tax exemption up to Rs7 lakh of income leads to a large proportion even of this segment slipping out of the net, though the numbers filing the returns look imposing! 
 
The next table shows the amount of gross total income shown in the tax return at different bands of income earned.
 
 
The total gross income offered by all taxpayers shown in the last row has grown by about 12% CAGR in the four years for which the above data is presented here. 
 
It is encouraging that this is higher than the GDP rise of 9.34% in the same period, reflecting a tax buoyancy better than 100%.
 
Importantly, the growth in the category of income earners above Rs1 crore is actually a whopping 21.8% which is well over 200% of the relative GDP growth. 
 
The good news is that the higher-income category is growing much faster and making a more robust contribution to the exchequer. 
 
Should this mean that tax exemption should be granted to all income below, say, Rs10 lakh or Rs15 lakh, as their overall contribution is not significant?  
 
 
Such an exemption may be an attractive political idea to pursue, as it will instantly fire up the markets and the popular sentiment. 
 
But it is a bad idea in economics to further shrink the tax-paying population which, even as of now, is globally one of the smallest in percentage terms. 
 
Also, the ratio of the exempt income of Rs7 lakh to our current per capita national income of approximately Rs1.7 lakh is the highest among any of the more relevant economies in the world like the G20 countries. 
 
There is no strong logic to further increase/ distort this proportion.
 
The area to restructure personal taxes should actually be to increase the number of high taxpayers as the data that the wealth inequality report 2024 came up with shows a much higher number of people in the country with very high levels of income than the numbers reflected in the tax filers’ list. 
 
Comparing the table below with the table that shows the number of taxpayers at different income levels will make the gap obvious.
 
 
Another piece of data that should worry the policymakers is the chart below which shows the extent to which taxation is able to smoothen income inequality by reducing the Gini coefficient. 
 
The data for India is one of the lowest, meaning that the current extent of taxation is hardly able to bring about bridging the income gap. 
 
 
Unfortunately, none of the official documents, like the economic survey, brings out such aspects. And any reliance on data from sources other than what is given by the government is viewed skeptically and brushed aside! 
 
Along with working on increasing the number of taxpayers at the higher income levels, the task is also to look at other avenues that erode the tax base, principal among which is tax exemptions to charities. 
 
The data below from the Budget document of 2023-24, which is the latest providing this information, shows that the amount of tax exemption availed by charities is significant.
 
 
By no stretch of the imagination is this a small number. The corresponding figure for the year 2015-16 is Rs23,6326 crore. 
 
The exempted income of the charities has been growing at an enviable rate of 20% in those six years, quite likely, faster than the growth shown by much of the corporate sector in the country!
 
Charities are loosely governed, despite the level of money handled by them, and many instances of abuse and evasion have arisen from time to time.
 
The law has also not been well conceived with constant litigation in resolving many contentious issues.
 
The time has come to revisit this subject in toto and put them through a three-year timeframe to apply normal tax rates after making allowance for genuine expenses incurred in the process of doing charity.
 
Initially, the exemption may be restricted to small charities that earn an income of, say, not more than Rs25 lakh per annum, to be gradually removed.
 
There is clearly scope to raise the tax collection from many avenues to garner resources for spending towards the welfare measures for the impoverished. 
 
We shall know on 23rd July if the third term encourages the government to take bold measures that may serve the country well in the long run. 
   
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
Comments
bipin.savla
1 week ago
How about taxing agricultural incomes above 10 lakhs ?Big agricultural incomes ( mostly of politicians ) go tax free . How do you explain salary earner paying tax and rich farmer going tax free ? Politicians Besides enjoying perks ( of all kinds !!!) their salaries are tax free
saran2sai
Replied to bipin.savla comment 1 week ago
True.
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