Budget 2023 #1 - Personal tax - Shiny optics, disturbing reality


By CA Vijaykumar Puri ~ Partner, VPRP & Co LLP, Chartered Accountants


man writing on paper
man writing on paper

“Shiny optics, disturbing reality”

Everyone is talking about the biggest amendments proposed by Budget 2023 in relation to personal income tax.

But we need to read between the lines to see a disturbing reality.

Let us see how –

- We now know that the Government of India is promoting a shift from old tax regime to new tax regime.

- One of the salient features of new tax regime is that most deductions and exemptions available under Income tax law are not available in the new regime.

- This has potentially far-reaching consequences which are not easily recognisable.

To understand the consequences, let us first see the logic behind deductions and exemptions.

Let us take a step back into the basics of the functions of a Government.

- Every civilised society is bound to protect and provide a healthy lifestyle to all its citizens. For this purpose, the Government levies and collects taxes.

If you see most European nations, they have high tax rates but provide highly subsidised free healthcare and education for its citizens.

- This concept is popularly called "social security".

- But the case of India is different. The Government, despite based on socialist principles, is unable to provide social security for its citizens directly.

- There are various reasons behind this – huge population, lack of infrastructure, problems in distribution methods, instability in Governments and policies etc

- So, in order to compensate for this lack of social security measures, the Government of India provides certain exemptions and rebates under Income tax law.

- Let us take the example of Section 80C deductions. Most of the deductions are allowed to promote a healthy lifestyle amongst the Indian populace – for example, deductions for life insurance policies, fixed deposits, housing, provident funds etc are designed to promote a habit of savings and stability, better quality of life amongst Indians.

- The Government is unable to provide social security for its citizens and hence, indirectly provides it through various deductions and exemptions in tax law.

Now, coming back to the shift in tax regime -

Since the Government is promoting the new tax regime which does not allow deductions and exemptions, this also means that the Government is indirectly reducing social security for its citizens.

The healthy habits which we have inherited from our parents (invest in provident fund, insurance, deposits, housing etc) are all being subtly reversed.

PPF is one great example (and I personally use it as well) – It is an EEE instrument i.e. the investment in PPF is exempted, the income from PPF is exempted and maturity proceeds are tax exempt too.

Even though forced, the PPF would give good returns. Today, it gives 7.1% interest rate which is tax free – certainly advantageous for an individual!

But with phasing out section 80C deductions, there is a huge chance that people will stop investing and saving.

The reason? There are many but one biggest reason at the macro-economic level is that the Government wants to promote spending of money.

So if Mrs Sheetal was incentivised to invest Rs 2 lakh a year to save taxes, if you take that incentive away, will she still invest Rs 2 lakh?

In an ideal world where everyone is financially disciplined, that would be true. But we do not live in an ideal world.

We live in a world where luxury is being made more affordable and savings are drastically reducing.

It is easier than ever to spend on luxury items.

Add more usable income in the hands of individuals, we can be sure that they would not be saved in “boring” fixed deposits or “boring” life insurance policies.

It will be used to satisfy momentary urge of online shopping or a down payment on that Mercedes.

YOLO, right!?

What benefit does the Government get from this?

If a common man spends more, that would lead to increase in the consumption in the economy.

An increased consumption would mean an increased GDP and growth rate.

All of which ties up with $5 trillion economy dream.

So, India will progress, right? What’s the harm, you may ask?

But the real question we need to ask – Progress will be at what cost?!

We have seen this exact model in developed countries like the United States.

People are hooked to consumption. They have no habit of savings within them.

(On a side note, in the US there is a mandatory 401(k) investment which promotes savings. The comparable provident fund in India is not mandatory for employees making more than Rs 15,000 a month)

But when there is high consumption, the economy grows at a sharp pace but individual savings are low.

This makes the country vulnerable to the bad effects of economic crises.

What was the reason that the economic crisis like those of 2008 hardly affected India?

Economists say that it is the strong savings culture – we traditionally spend less than we make. So, when the global economic growth slowed down, no one was left out on the street.

One can argue that this is one of the biggest reasons why India has been relatively immune to the ongoing 2023 recessionary crisis as well.

Let’s face it – market downturns happen. It is the economic cycle and no one can stop it.

But if we take away those savings, we are leaving India susceptible to huge recessions.

If unchecked, this new tax regime can be a silent killer of the fundamental principles of the Indian society.

Maybe not in 2 years or even 5 years, but 10 years from now - the effects of this “consumption culture” will be felt. And it will not be pretty.

Who is the biggest loser?

The biggest loser from this entire fiasco is definitely the middle class.

In case of an economic recession and people are living paycheck to paycheck, who will be hit by a sudden increase in prices and a simultaneous economic slowdown?

Listen, the rich have enough to fend for themselves in a rainy day (or year), and the poor will definitely be bailed out by the Government through populist schemes.

It is the middle class which will be left hanging and depressed, like always.

The new Income tax regime, which is marketed as a saviour for the salaried middle class, can become the reason why the middle class will become susceptible to economic recessions!

Oh, the irony!

What is the way forward?

In any civilised society, the Government cannot force its citizens to live in a good way. Instead, a good living has to be incentivised and promoted through various means or schemes.

What the Government needs to do is promote social security in some form or the other. The best and ideal way is by giving tax breaks (which is currently the case). In case the Government wants to stop giving tax breaks, the best incentive is to develop a scheme for the middle class where the Government will fund a certain portion of the savings or investments.

However, for any of this to happen, the lawmakers have to look at the repercussions of their actions in the future.

The first step lies in recognising the danger of removing incentives to save. The remedies will follow!


Stay tuned for such insight in our Budget 2023 Series! The author can be reached at vijay@vprpca.com.