We saw a progressive budget yesterday but with a lot of heartbreaks. What I liked is the focus on capital investments, green tech etc which was amazing. However, the heartbreak was for the middle class which was not forgotten but they got much less than what they had been hoping for.
What India was expecting was a budget which would have increased the tax base and made noncompliance a foolishness. For that to happen the individual tax rate needs to be cut down to 25% to be equal to the corporate tax rate. Several countries have implemented a strategy of reducing direct tax rates in order to increase their direct tax collections. This approach, often referred to as ‘tax simplification’, has been shown to be effective in boosting tax compliance and encouraging economic growth.
The countries that have seen notable success in this area include India, the United States, and the United Kingdom. In India, the government reduced the corporate tax rate from 30% to 25% in 2019, leading to a significant increase in direct tax collections. In the United States, the Tax Cuts and Jobs Act of 2017 reduced the federal corporate tax rate from 35% to 21%, resulting in an increase in business investment and economic growth. In the United Kingdom, the government has reduced the corporate tax rate from 28% to 19%, resulting in an increase in direct tax collections and a boost to the country’s overall economic performance.
These reductions in direct tax rates have not only led to increased direct tax collections, but also improved the business climate and competitiveness of these countries. The reduced tax rates have encouraged businesses to invest more, create jobs, and stimulate economic growth.
If this can work for corporate tax, why can’t it work for the individual taxpayers? In India, as people say, only the salaried pay taxes while we have crores of individual business owners & proprietors where the tax compliance is minimal. By reducing direct tax rates and simplifying their tax systems, governments can increase direct tax collections and improve the overall business environment by promoting even sole proprietorships which are a backbone for a country like India.
Also, this budget dealt a huge blow to social security as the new tax regime does not force people to go for social security schemes like EPF, Insurance, ELSS etc which not only provide social security but also provide long term private capital for infrastructure growth which is very well required. It would have been great if the finance minister had also given the old tax regime a flip by increasing the section 80C limit by Rs 2 lakh and restricting section 80c benefits to only long term investments like life insurance, ELSS etc. The reduced long term social security saving is going to create a huge social upheaval as the population ages.
The recent budget in India witnessed a mixed reaction, with both praise and criticism. On the one hand, the focus on capital investments, green technology, and other progressive initiatives was applauded, but on the other hand, the middle class was left disappointed with meager provisions.
(By Sanjiv Bajaj, Jt. Chairman & MD, Bajaj Capital Ltd)