The Union Budget for 2018-’19, presented by Finance Minister Arun Jaitley on Thursday, is the Narendra Modi government’s last full budget before the next Lok Sabha election. As such, political considerations were paramount: given the widespread discontent among farmers, the Budget focussed on agrarian welfare. In the process, the middle class seems to have been squeezed.
The number of Indians who file income tax returns has grown at a healthy clip, from a base of 6.47 crore at the start of 2014-’15 to 8.27 crore at the end of 2016-’17. But tax recovered per person is still rather low. Jaitley pointed out that “there is a general perception in the society that individual business persons have better income as compared to salaried class”, yet data suggests the former pay lesser tax. In fact, salaried individuals, on an average, pay three times as much income tax as business persons. To rectify this, the Budget proposes a standard deduction of Rs 40,000 against transport and medical allowances for the salaried.
This might seem like a big deduction but it is more a case of clever relabelling. Medical expense reimbursement and transport allowance anyway allow for a tax-free salary of Rs 34,200, as The Times of India pointed out.
On the other hand, the cess – a tax collected exclusively by the Union government and not shared with states – on income tax has gone up from 3% (called “education cess”) to 4% (now called “health and education cess”).
Taxing stock market
More significantly for many middle class Indians, the central government has introduced a new long-term capital gains tax. Capital gains is the profit earned from the sale of corporate shares, securities or mutual funds while “long-term” is currently defined as any period over a year. So far, capital gains accrued under a year were taxed at 15% but long-terms gains were exempt. This tax regime, Jaitley argued in his speech, has “created a bias against manufacturing, leading to more business surpluses being invested in financial assets”. So, Budget 2018 has introduced a long-term capital gains tax of 10% for gains above Rs one lakh.
This tax will significantly affect middle class India, extending to even small towns. Demonetisation catalysed investment in mutual funds since increased bank deposits drove down fixed deposit rates. With returns on gold and real estate listless as well, the middle class turned to the equity market, leading to a significant increase in overall assets managed by the Indian mutual fund industry.
That is not all. There is also a new 10% tax on dividends from equity mutual funds. This is not paid by the investor but the mutual fund, but since it will eat into profits of the mutual fund managers, it will eventually end up eating into dividends the investor receives as well.
Some women will see a small increase in their take-home pay. To push more women into formal employment, female employees will now only contribute 8% of their salary to the Employee Provident Fund for the first three years of their employment. The rate was either 12% or 10% until now.
The middle class will have to pay more for mobile phones and television sets as well. Custom duty on cell phones has gone up to 20% from 15% earlier and for some TV parts to 15% from either 10% or 7.5%.
Eye on the election
The 2014 election saw the middle class turn out strongly in support of the Bharatiya Janata Party and, specifically, Modi. One study determined that there was “strong affinity for the BJP among the upper middle and middle classes” as they voted for their Lok Sabha candidate. Since then, the BJP has maintained a large measure of middle class support, but agrarian distress has meant the party has felt some heat as well. In the December 2017 Gujarat Assembly election, for example, the BJP lost out significantly in rural seats to the Congress. Given that a Lok Sabha election cannot be won in India if the country’s rural populace votes against you, this Budget can be seen as the BJP tapping the middle class in order to appease the rural voter.