Reciprocity hallmark of interim Budget

TS Ramakrishnan
Public Policy Analyst 

THERE were several interesting announcements in the interim Budget, of which two stand out. First, financial support of Rs 6,000 per annum in three instalments, directly transferred into the bank account of farmers with landholdings up to 2 hectares. The Pradhan Mantri Kisan Samman Nidhi scheme would benefit 12 crore farmers and cost Rs 75,000 crore annually to the exchequer. There was immediate criticism that this financial aid amounts to just Rs 17 per day for the farmer. Both the Centre and state governments have been supporting the cause of farmers through various welfare schemes, be it subsidised seeds, manure, pesticides, low-interest loans to buy farm equipment, crop insurance in the form of Pradhan Mantri Fasal Bima Yojana or an increase in the minimum support price (MSP) for some crops. The governments of Telangana and Odisha have already announced and implemented support schemes on the lines of Pradhan Mantri Kisan Samman Nidhi. So, Rs 6,000 per year is not a stand-alone gesture for the farmers. Moreover, it will be given to medium and small farmers. Why? Any welfare scheme should be a targeted one, not universal. It is the small farms that achieve much higher productivity than the big ones.

The most critical problem the NDA government faced when it came to power was the double-digit inflation arising out of the Consumer Price Index (CPI). The Compound Annual Growth Rate (CAGR) of inflation was 10.1 per cent between 2009 and 2014. The basket of food items alone constitutes about 60 per cent of the CPI. In 2014, the price of pulses reached Rs 200 per kg and the prices of fruits and vegetables showed enormous fluctuations. The various schemes that were announced by the Union Government to increase the production of pulses and other farm produce have been well utilised by the farmers. They produced grains, pulses, vegetables and fruits that have outpaced the demand. The surplus production of agricultural commodities contributed significantly to keep the food inflation, and hence the overall inflation, in check. The CAGR of inflation in the past four and a half years is 4.6 per cent. The price rise, which is normally the most prominent poll issue among the electorate, is not a plank in the 2019 General Election. The government knows that this became possible due to the tireless efforts of farmers in improving farm productivity. Hence, as a mark of respect, the government decided to pay Rs 6,000 to small and marginal farmers. 

The second key announcement is the income tax rebate given to those who earn up to Rs 5 lakh per annum. Since 2014, the NDA government increased the minimum taxable income from Rs 2 lakh to Rs 2.5 lakh, decreased the tax rate from 10 per cent to 5 per cent for the income range of Rs 2.5 lakh and Rs 5 lakh, and introduced the standard deduction of Rs 40,000. Given the low inflation in the past four years, the benefits announced by the government are more than enough. Then, why did the government announce a rebate of income tax for those who earn up to Rs 5 lakh per annum? After demonetisation, the government has been promoting digital transactions through Universal Payment Interface (UPI) like BHIM. Then, it introduced GST to bring those who have been evading indirect taxes into the tax ambit. These structural reforms were essentially aimed at taxing those who evade taxes (direct and indirect) and thereby reducing the tax burden on the salaried class whose income tax component was deducted at source. As per a report prepared by the Income Tax Department, for every $100 that the US government is supposed to receive as income tax, it gets $80, whereas the Indian government receives only Rs 25 for every Rs 100 it expects to get. However, due to GST, which tracks the movement of goods from raw material to finished products through electronic trailing, indirect tax evasion is now difficult; with proper accounting of business and trade, direct tax evasion also becomes tough. Even after reducing GST substantially compared to the previous component of central excise and sales tax or value-added tax, indirect tax collections are robust. Once the GST regime is streamlined, the taxable income would increase as tax evasion would reduce further, leaving scope for the government to reduce the tax burden. 

By giving income tax rebate to those who earn up to Rs 5 lakh, the government has conveyed to the people that if they cooperate in expanding the tax base and be honest taxpayers, it would be reciprocated in the form of tax cuts. 

Income tax for those who earn up to Rs 5 lakh is nil. But, what about those who earn one rupee more than Rs 5 lakh? Don’t they have to pay Rs 13,021 as income tax? There are many provisions, such as standard deduction of Rs 50,000, deduction of Rs 1.5 lakh through Section 80C, deduction of Rs 50,000 through the National Pension Scheme, and deduction of Rs 2 lakh (interest on the housing loan). With the utilisation of these exemptions, people earning as much as Rs 7-9 lakh will get full rebate from income tax and not just those who earn only up to Rs 5 lakh. 

Earlier governments followed the approach of collecting taxes from those who were left with no option but to pay taxes, such as the salaried class, and burdened them with more taxes, while hardly making efforts to bring to book the tax evaders. This government has brought systemic changes so that all those who do business pay indirect taxes and all those who earn pay taxes as per their income tax bracket. A good and effective government should show gratitude to those sections of the population that pay taxes honestly and increase productivity (farmers in this case) and be strict and harsh with those who evade taxes. Through the interim Budget, the government’s message is clear: We respect and reward all those who contribute sincerely to the nation’s development.