Budget 2020 introduced a dual tax regime with differential tax rates. The idea was to give a choice to the individual tax payers between two options. They have the choice to continue with the existing tax slabs and claim all exemptions and rebates. Alternatively, they could opt for a lower rate of tax in most slabs up to Rs.15 lakhs income but they will have to forfeit nearly 70 out of the 100 exemptions including Section 80C, Section 24, Section 80D and even standard deduction benefits. But first let us understand the logic behind the tax changes introduced.
Why the consumption push and how?
As the monthly sales numbers of cars and FMCG products started trickling in, the one big question that people were asking was whether the government could do anything to address this consumption slowdown. It was a combination of high cost of ownership and also weak business outlook that compelled people to postpone purchases. The only way to break this chain of diffidence was to put more money in the hands of the people. However, it was essential to put more money in the hands of the right people so that the impact on consumption is palpable. It is from this perspective that the tax system was designed. Let us look at the old versus new tax slabs.
According to a study by Boston Consulting Group, the persons earning up to Rs.20 lakhs were the most aspirational in terms of consumption and they should be the target of any consumption push. If you look at the tax structure modification above, it is clearly focused on the lower to middle income groups. This group is not only large in number but is part of the financial mainstream and also willing to spend their surplus money on consumption. In fact, the new tax scheme has done away with most exemptions and actually encouraged consumption over savings. While the merits of this move can be debated, the clear focus is on putting more money in the hands of a class of people who are most inclined to spend.
Will the dual tax regime actually increase purchasing power?
On paper, it does look like it will push consumption. But here are some key factors to consider in this calculation.
- It must be said that the Budget 2020 has certainly laid out a coherent roadmap to boost the income and purchasing power of the people of India. The actual impact on consumption may have to be fine tuned along the way.
- The benefit of the shift to the new tax regime is highest for persons who are earning between Rs.10 lakhs and Rs.15 lakhs. This segment is also likely to contribute the most to the consumption boost from the middle and the aspiring classes.
- The shift in the dual tax regime could have an impact on long term saving as most tax payers will not be inclined to save under Section 80C if the tax benefits are not available. It may give a boost to consumption from the consuming class but it will be at the cost of savings rate.
- Apart from the dual tax regime, the shift in tax on DDT will also be a positive for the consumption story. The dividend distribution tax had reduced the ability and inclination of the companies to pay dividends. This gets addressed by the shift of tax onus from the company to the customer. This will also boost consumption.
- In addition to the benefits of lower taxes for the largely urban consumer, the rural farmers will also see a boost to incomes from bigger investment in the guaranteed employment programs as well as in rural infrastructure. The government has also reiterated its commitment to stick to doubling of farm incomes by 2022 and that could be a real boost to rural consumption.
For consumers, the real bonus in the Budget has come from the revision in the rates of personal income taxes. The new tax regime for individuals will help increase liquidity in the hands of the common man. Hope this will help raise overall expenditure and consumption, thus giving the much-needed push to our economy.
As a tax payer does this change in personal tax really increase your cash in hand?