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Why it is unfair to call Modi government ‘anti middle class’

On 1 February, Union Finance Minister Arun Jaitley presented the Budget for the year 2018-19. Since it was the last full budget before the next Lok Sabha election, many people had expected that it would be populist. Salaried middle class had anticipated a significant relief in Income Tax. However, Jaitley did not give the expected relief to taxpayers.

Even the reintroduction of Standard Deduction failed to cheer taxpayers as its benefits got almost wiped out due to withdrawal of transport and medical allowance exemption. By the time Jaitley’s budget speech was over, social media and office corridors were rife with criticism for this “anti middle class” budget. A perception got created that Modi government had done nothing for the middle class in four years. Several people felt betrayed by the man behind whom they had rallied during 2014 election. Some even declared that they would not vote for BJP in the next election.

Being a middle class salaried taxpayer, I was intrigued by the severity of this criticism. Though Jaitley isn’t exactly a taxpayer-friendly FM, I never felt that honest taxpayers had suffered more under Modi government. So I decided to analyse income tax structures since 2013-14 to find out if middle class taxpayers were indeed worse off in the last four years. Below are my observations –

(Disclaimers:
1. I have assumed that middle class taxpayer = person having annual income between ₹5-50 lakh
2. I have deliberately ignored changes in IT rules which are applicable to women and/or senior citizens. The intent is to evaluate changes which are applicable to all middle class taxpayers.
3. Rebate under section 87A was increased from ₹2000 to ₹5000 in 2016-17, but was reduced to ₹2500 in 2017-18. For the sake of simplicity, I have ignored this net additional benefit of ₹500)

From the above table, it’s evident that for the same level of income, tax liability for middle class taxpayers has reduced across the board. Depending on the highest applicable tax slab and investment profile, a taxpayer can save up to ₹85,120 (minus 1% cess) as compared to 2013-14. A person having no investment and no loan is also saving ₹17,500 (minus 1% cess) in tax.

For people having home loans, the interest rates have come down by around 1.5% since 2014. This has resulted in significant saving. For instance, a person with a home loan of ₹75 lakh for a period of 30 years would be saving around ₹1 lakh per year due to reduced interest rate.

These are clear tangible benefits for middle class people. They should be looked at as a package of five years, not in isolation. Also, there are intangible benefits like more efficient use of tax money by reducing leakages through use of technology, improvements in urban infrastructure – Metro Rail, peripheral roads, improved highways, better power availability, etc. Prices of everyday use items have reduced after the introduction of GST. Government has managed to keep inflation in check.

On the issue of tax on Long Term Capital Gains, it’s a common practice around the world to tax LTCG. India had LTCG tax until 2005 when it was abolished based on Kelkar Committee report which said that the source of these gains (i.e. money invested) is already taxed, so taxing LTCG amounts to double-taxation. However it can be argued that this logic is flawed because under LTCG tax, only the gains are taxed, not the principle invested. While reintroducing LTCG tax,  Modi government has given a cushion of ₹1 lakh per year to protect small investors, and has proposed a flat rate of 10% which is reasonable. Also historical gains have been protected through grandfather clause.

In summary, it would be grossly unfair to accuse Modi government of being “anti middle class”. But perception management has never been this government’s strength, and I fear that BJP will have to pay electoral price for the wrong perception formed after the Budget. At the same time, taxpayers should realise that paying due taxes is a duty of citizens, and India’s Income Tax rates are fairly moderate for a developing, non-oil economy.

(With inputs from @muglikar_ )

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