It has been 10 years since the government gave any tax relief to the middle class! It was expected that the Finance Minister Nirmala Sitharaman would be increasing the tax deduction limit under 80C of Income Tax Act from ₹2.5 lakhs to ₹4 lakhs or ₹5 lakhs along with standard deduction in the first Budget of Modi 3.0 with the purpose to increase the demand in the Indian economy which would lead to more jobs because of increased disposable income. However, the budget is not that generous as far as the deduction is concerned. I, along with other economists, was sure and still am that if only the standard deduction limit is increased, then it would not be able to achieve the dual goals of increasing economic activities in the economy as well as controlling the falling savings in the economy.
However, the Indian government is following a different strategy to increase the economic activities in the Indian economy and this route stems from the fact that only 2.2% adult Indians pay Income Tax (direct tax) to the Government of India. India aims and is working on the strategy to increase this proportion. However, it should also be noted that if India wants to increase the share of direct tax in the total revenue then India needs to increase the real average income of the adults and that can happen only with increased economic growth in the long term. To keep GDP growth rate on the higher side, India needs to increase investment in capacity building in the Indian economy and for this economy requires huge savings to support and fact is that savings in India is falling.
In the budget there is not much to increase savings in the economy however from its decision to increase capital gains tax, it seems that it is aimed at improving the flow deposits in the banking system which has been reported as per RBI and SEBI to be deteriorating as most of the saving money from the banking system has been finding a destination either in the equity market or mutual funds?
Many would argue that increasing tax deductions limits would negatively impact tax collection and spending of the government. Rather it is contrary. It would result in more indirect taxes from increased disposable income and higher corpus in the form of long term savings to increase capacity. The government has taken this route because it is going to invest huge money in growth and development of the economy along with job creation and skilling which is the need of hour if India wants to enjoy the benefits of demography!
Rajeev K Upadhyay
No comments:
Post a Comment