Much awaited Union Budget is finally out – amidst lot of expectations & hope. Hope that it will do something to improve private investment sentiment; provide extra fillip to public spending till private investment picks up and at the same time boost consumption. It is with regard to this last point, viz. boost consumption, that many expected that Finance Minister would cut individual tax rates to increase the disposable income in the hands of common man and, thus, help generate demand.
There are contrary views about this route of boosting consumption through tax cuts. On one hand, many believe that this would increase disposable income & help increase consumption. Another minority view is, this would end up increasing liquidity in the economy & might add to already rising inflationary pressures in the economy. And further, what if people still choose not to spend, but save.
It is in this light that we need to see the changes to individual tax rates. Superficial glance at the changes would indicate that it does not do anything to add to disposable income of people. On the contrary, it may even increase the tax outgo for many. At the same time, all those people ridiculing the futility of revised tax structure are possibly overlooking the fact that individuals are now free to spend the way they deem fit – without much consideration for tax implication of their expenditure or investment.
It needs to be understood that some of these exemptions and deductions are instruments to nudge people towards the intended financial decisions. However, tax implications cannot and should not be the only criteria for making these decisions. And government cannot be seen marketing for certain sectors when it is not doing so for others. For instance:
- Life Insurance: One of the biggest area where investment is driven by tax consideration than financial prudence is Life Insurance. There is a wide misconception about Life insurance. It is being looked upon by many as an investment instrument, far from the real objective of this product. Insurance & investment are totally different things. I know many people who invest in low yield insurance products only because they believe in reducing tax outgo & not in increasing Return on Investment over the period. Also, many people are largely under-insured only because they do not believe in term insurance products that do not yield return on maturity.
Successive governments have done enough to popularize insurance sector. Possibly also because it is one of the largest commercial player in the sector. It’s about time that the Insurance sector take up the mantle of developing the insurance sector market for what it is – without the cushion of government policy that doubles up into additional return on investment.
- Real Estate: This is another category where one of the important decision driver is tax benefit & not expected Return on Investment. Granted that good health of Real Estate industry is important for many sectors of the economy. But the primary responsibility for the industry to do well is of the industry itself, not government. Government cannot be expected to subsidize the buyers to help builders maintain their price levels, while they would continue to sit on idle inventory till prices improve.
Also, financial industry needs to decide if it wants to do business of easy, relatively risk-free & secure loans that build largely non-productive capital, then it needs to have USP of its own; not bank on government policy that has its implicit cost to exchequer.
- Other investments-based deductions: It always has to be individual choice where s/he wants to spend / invest. There need not be inclination for certain type of expenditure / investment only because it is more tax efficient. The decisions for such investments / spend should be driven by their respective merit alone. No prudent person can and should take such decision purely on tax consideration.
So, it can be said that government is in the right direction when it comes to removal of such investment-based deductions and let individuals choose what they want to do with their disposable income – whether spend or invest; and if invest then in which instrument. The new alternative tax slabs especially benefits retired people or newly employed who now have more freedom in deciding their investment or consumption.
However, one area where new structure seems to have faltered is complete removal of exemptions & deductions available to Salaried class like Standard deduction, HRA and other such expenditure-based allowances. It can be said that it removes a level playing field vis-à-vis income from other avenues like business / profession or house rent – which continue to enjoy most of the existing expenditure-based deductions. The assumption or premise that there is no cost to earn salary is incorrect. It would have been good, hence, if all allowances were merged into one common increased standard deduction. Reintroduction of standard deduction last to last year was step in right direction. The step to remove it now seems retrograde.
To conclude we can say that the new personal tax regimen is a tightrope walk, mostly in a right direction, at a time when both investment and consumption need a push.
The writer is Associate Director at Leadge Business Services Pvt. Ltd.