Of the savings and investments wishlist I had from this budget, nothing has been implemented, and yet I can’t help saying that this is a good budget. Of course, there are some caveats I have, but I’ll discuss that later.
There are two changes in the savings and investment area, both of limited relevance. One is a change in Long Term Capital Gains Tax, but not the one that investors were scared of. You’ll recall that ever since the Prime Minister spoke against this zero tax back in late December, there was widespread expectation (despite the Finance Minister’s assurance) that this tax will be brought in. That hasn’t happened, and it would appear that the PM’s irritation has taken a backseat to Mr Jaitley’s soothing words.
The other change is that the Rajiv Gandhi Equity Savings Scheme has been given a quiet burial. I doubt whether anyone will lament this convoluted and thoroughly useless scheme that was a product of muddled thinking in Pranab Mukherjee’s finance ministry. I won’t bore you with the details because they are not relevant to anyone anymore. Suffice to say that these two measures were both buried in the annexure to the speech.
The focus of tax-breaks at the lowest end of the taxpayer slabs as well as at the smallest companies is characteristic of this government. This brings significant relief to the largest number of people and businesses at least cost to revenue, and that’s the way it should be. The five per cent reduction in rate for both has huge significance. It amounts to 16 per cent lower tax outgo for small companies. For individuals in the lowest tax bracket, this change will mean a reduction of 50 to 100 per cent in actual tax outgo.
The most distinctive part of the budget speech was the FM’s detailed, data-driven explanation on how India is largely a non tax-compliant country. He made this point convincingly. It’s absolutely shocking that at the top end, 1.48 lakh bank accounts saw an average of Rs 3.3 crore of cash deposits each during the demonetisation window and yet there are a mere 1.7 lakh people in this country who file returns showing an income higher than Rs 50 lakh. From what the FM said in the speech, it’s clear that demonetisation has triggered a huge effort to expand the direct tax base.
If this is done with any kind of efficiency, then the country will enjoy the fruits of the demonetisation labour on a permanent basis. Of course, all this depends on whether this is done in the regular way that revenue officers work, or if there is some special effort at working in a clean and efficient way. In fact, for a government that has done so many things right, the lack of perceptible change in the set ways of income tax officers is an unforgivable blind spot. It’s possible that Mr Jaitley is quietly chipping away at the corrupt and inefficient ways of his tax collectors. However, some visible evidence of such an effort would have gone a long way in assuring honest taxpayers that the bonanza of data and intelligence that demonetisation has provided won’t be frittered away in lining the pockets of the same people.
The non tax-compliant state of India has come about because of an entrenched nexus of tax-officials, chartered accountants and business owners. Breaking this is the hardest part of fixing India, but this is the best chance of actually doing so till now. In fact, I’m absolutely amazed at the solid beginning that the Modi government has made on fixing political financing, which would have been considered even more difficult. The drastic lowering of the parties’ cash contribution limit, the tough new rules on political parties’ income returns, and this awesome idea of electoral bonds constitute the beginning of what is a most crucial reform.
The multi-pronged attack on black money that demonetisation and this budget represent is a most crucial effort by Narendra Modi’s government, and to a huge extent, India’s future depends on the degree to which this succeeds.
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