Before every budget, it is customary for commentators to say that this is going to be a very crucial one. Certainly, some budgets are more important than others. One such budget was last year's being effectively the first real budget of the NDA government. The coming budget is a little different. Depending on what the finance minister does, it could be a crucial budget, or a humdrum one. Certainly, it will be a very difficult budget. Given the huge headwinds that the economy is facing, it should be an expansionary budget, except that the fiscal constraints almost mandate a tight one.
Given the situation, what could the ordinary saver and individual investor expect from Mr Jaitley on February 29? As it happens, even in this situation, there are a number of things that we can legitimately expect. Let's take a look at what they are. Firstly, Mr Jaitley must slide up the exemption limit and tax slabs in keeping with the inflation. This should be a standard part of every single budget. If ₹2.5 lakh was exempt last year, then it must be revised upwards in keeping with inflation.
In fact, I have long argued that all rupee amounts in personal taxation should automatically be revised upwards in keeping with inflation every year. The government's booty is always defined as a percentage and therefore slides up automatically as your income increases. In all fairness, this automatic revision should also apply to the tax slabs, the section 80C tax exemption limits as well as every other rupee amount that is there in any part of the tax laws and rules. However, I do realise that this inflation-indexation is one of those wishes-were-horses things that won't actually happen. When finance ministers raise these limits, they like it to be seen as largesse that they are bestowing upon the populace and thus earn some political capital out of it. But even so, this is something that should be done every year.
Another important to-do has to be the cleanup of the tax mess around the National Pension System (NPS). The NPS has high taxation compared to its alternatives. Unlike the EPF and the PPF, NPS withdrawals are taxable income. When an NPS member retires, 40 per cent of the accumulated money in the account has to be used to buy an annuity which will provide a pension. The money is not taxed at the time of the annuity purchase, but the resulting pension is taxed just like any other pension. The problem is that the remaining 60 per cent is taxable, in contrast to EPF and PPF. Savers consider this to be unfair and most financial advisors cite this as an overarching reason for disqualifying NPS as a vehicle for discretionary retirement savings. In fact, there is an additional problem with this, over and above the taxability. Common sense would dictate that the accumulation in NPS should be treated as capital gains. Moreover, the acquisition value of the NPS units should be indexed according to the cost inflation index that the government releases every year for the purpose. From the point of view of the nature of the investments and the asset types, NPS is identical to a debt-oriented hybrid mutual fund, and savers should expect a similar tax treatment. Senior finance ministry bureaucrats have publicly said that they recognise this need, but haven't committed to a fix.
Actually, this is connected to an even larger and more important NPS-related project that was started with the last budget and must be pushed forward resolutely. This is the gradual replacement of the EPFO system with the NPS (I say gradual not because that's better than sudden but because sudden is too much to hope for). Private employers should be allowed and encouraged to replace EPF with NPS. The NPS has far better returns, actual choice of investments, and much higher service standards. Compounded over the entire career of a saver, the difference in return can amount to the difference between old-age poverty and wealth. However, unlike EPF, the NPS is still taxable and that makes this otherwise desirable shift a non-starter. The NPS is now 12 years old and Mr Jaitley must not allow its taxation anomaly to linger any longer.
Another front on which action is needed is a re-energisation of the Senior Citizen Saving Scheme (SCSS). This scheme is dying. In five out of the last seven years, the scheme has had net negative flows. Money is now flowing out at a rate much higher than it is flowing in. In terms of savings culture, we are a fixed income country and specially so with the older generation. Those who wish to invest in a government guaranteed scheme meant only for older people should be given somewhat higher returns and a reasonably high limit. The government should maintain a clear interest rate advantage over bank FDs for the SCSS as well as enhance the per-person limit to ₹25 lakh. The SCSS can be a great comfort to low-savings retirees who are not comfortable with any risk, and it should be nurtured in this role instead of being allowed to die of neglect.
Another savings-related reform that is sorely needed is to fix the Know Your Customer (KYC) mess. The plethora of KYC, re-KYC and re-re-KYC that has been going on in this country is a serious impediment to less resourceful savers. A genuinely simple and unified KYC is badly needed. While there have been efforts at various levels to tweak rules, the lawyerly opinion within financial service providers is that no real simplification is possible without amending the Prevention of Money Laundering Act. Whether this fits into the finance bill or not, it's something that must be considered urgent.
Unfortunately, except for KYC, every single budget expectation that anyone has heard or read boils down to the government either taxing less or spending more. Is this likely to happen in the current fiscal climate? I don't know, and it's not really my problem.
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