For finance minister Arun Jaitley, the drubbing that the BJP received in the Delhi Assembly elections means going back to basics — woo party’s core constituency of aspirational middle and neo-middle class. So the forthcoming Union budget is expected to see more tax sops on personal income tax. Mr Jaitley is likely to hike the tax exemption limit from Rs 2 lakh and increase tax saving investment limit from Rs 1.5 lakh to Rs 2 lakh to leave more cash in the hands of the people.
While the wholesale price index inflation has gone into negative, there are still a host of items of common household use like fruits, pulses and vegetables that have witnessed annual inflation between 8 and 12 per cent.
In fact, hike in personal income tax exemption limit to Rs 3 lakh and deduction for housing loans up to Rs 5 lakh and upward revision in the allowance for medical reimbursement were the main expectations of salaried individuals from the Union Budget, according to a survey done by industry chamber Assocham. An overwhelming 92 per cent of the salaried individuals, bsoth men and women, said the government needs to increase the tax bracket from current Rs 2.50 lakh to at least Rs 3 lakh so that more money is left in the hands of the common public.
Earlier this month, even Reserve Bank of India (RBI) governor Raghuram Rajan asked the government to increase the tax exemption limit on financial investments by individuals. He said that while Mr Jaitley increased it in the last year’s budget “benefits of this instrument had been lost over time as the limit was anchored at Rs 1 lakh for a long time”. It will also help in increasing the savings rate in the country. India’s national savings rate has dipped to the 30 per cent level from a high of over 36.9 per cent in 2007-08. To woo back the neo-middle class, which propelled Narendra Modi to majority, Mr Jaitley could announce lower import duties on some consumer products, more spending on better urban infrastructure and expanded skill training programmes.
This class consists of a large mass of people in Indian cities who are no longer poor, but are also not yet in the middle class. It is this class that wants more opportunity and prosperity and dreams of a better future. It was this neo-middle class that whole-heartedly bought Modi’s message of “achche din”. It was also this class that turned away from Mr Modi during the Delhi assembly elections and voted en mass for AAP’s Arvind Kejriwal who promised cheaper electricity and water. It is important for Mr Modi to woo them back and it is here that the budget will have to play an important role.
Recently, economist Jagdish Bhagwati, who is considered to be close to Mr Modi, said that BJP was no longer dependent on the shopkeepers and traders and therefore would go for bolder reforms. However, Mr Jaitley is unlikely to go for any drastic reform measures, but will rather take small steps that do not anger any constituency. However, to keep the industry which has already started complaining, in good stead, Mr Jaitley could announce sops for the manufacturing sector. Industry was an important backer of Mr Modi and BJP knows that it will need to have its support for the government’s endeavour to create jobs.
Mr Jaitley can reduce the rate of minimum alternate tax (MAT) for manufacturing, a longstanding demand of the corporates. There will be additional resources announced for the infrastructure sector and promise of less regulatory hurdles and faster clearance. Mr Jaitley is also likely to assure investors that there will be no witch hunt from the dreaded income tax department.
In continuation with its pro-investors stance, government may defer implementation of general anti-avoidance rules (GAAR) in the forthcoming Union Budget. There has been an intense lobbying from the industry that the controversial GAAR implementation should be deferred. According to existing rules, GAAR will come into effect from April 1, 2015. Retrospective amendment to the income tax act 1961 and GAAR proposed by the UPA government were perceived as the steps that hit investors sentiment towards India. The government is likely to take more steps in the budget to ease the doing of business in India.
Mr Modi came to power by wooing different segments, and the first full-fledged budget of his government will show whether he lives up to those promises.