Simple taxation, fewer savings
The budget strongly pushes towards the new, simple income tax regime.
While this is a good thing, removing savings incentives is an unfortunate side-effect. In the words of a notorious character from a once-famous anti-war film, “It smells like victory.”
After almost three years of Covid, with much of the world still reeling under the aftermath of governments trying to cope with various crises, India has pulled ahead of the pack.
During Covid, most countries were dealing with the Chinese virus, and the goal was to spend-spend-spend without getting the fiscal situation too much out of whack.
Some succeeded, many didn’t, but India certainly did.
The centrepiece of a regular budget is always some tweaks to taxation and savings exemptions; in any case, that’s what I’m most focussed on.
On this count, this budget is somewhat hard to react to, with there being a huge positive with a decidedly negative side effect.
On the one hand, we are now moving emphatically towards a new, simplified tax system. Back in 2020, that year’s budget had initiated a new, simple tax regime marked by lower rates and very few exemptions. That was before Covid.
Now, the government has decided the time to transition to the new system in earnest.
There is a slew of tax measures in the budget, and practically all of them are targeted at making the new tax regime more attractive than the old one. It’s quite clear that this process will continue until we can say goodbye to the old tax regime sooner or later. This is the correct overall direction for the tax system.
What the old ‘Direct Tax Code’ attempted more than a decade ago and failed to do, the new tax regime has given operational shape. A simple system is better in theory and in practice.
We know that exemptions are inherently biased towards the well-off being able to game the system and pay less than what they should be doing.
Moreover, a parallel system, under which the two systems will run side-by-side for some years, is the best way to do this.
Still, I’m deeply ambiguous about the new deal’s impact on people’s savings and investment habits.
In principle, it’s good to have the option of paying less tax without using exemptions, but taxpayers who do so will have less incentive to save.
There are good and bad exemptions, but exemptions that create the habit of savings are unequivocally good.
My take on this is clear-— the reduced incentive to save in the new optional tax regime will mean fewer savings and, later in life, more financial problems for most people.
Unless tax-saving investments are available, many people, especially those younger and with lower incomes, will not save at all.
Our consumerist society is designed to encourage people to spend, not save. The tax investment becomes a gateway that eventually encourages savers to save more. I’ve seen this happen countless times with young people whom I know.
You start with these and get good returns because of the lock-in period. For many, this becomes the foundation of a lifelong saving and financial security habit.
Completely doing away with tax-saving investments is an unfortunate side-effect of the new tax regime and one that I hope the finance minister will take a close look at.
Dhirendra Kumar is CEO of Value Research Online