Three days have gone past since our Finance Minister Arun Jaitley presented the annual #Budget2018 last thursday. I guess it gives all of us enough time to scrutinize it and present our opinion on what was changed, what was introduced, what was taken away and how does it affect us all. With the #Budget2018 being the last full budget of NDA Govt led by Prime Minister Narendra Modi, it was hugely expected that this would be a largely populist budget keeping 2019 General Lok Sabha Elections in mind and to mobilize the traditional voters towards BJP. Shockingly though this was not the case.
I have been interacting with many salaried middle class staunch Modi supporters in the past three days, personally and on various social media platforms, and all of them seem unanimously disgruntled with #Budget2018. They strongly believe that the salaried middle class is pretty much neglected in this budget altogether. And their disappointment doesn’t seem baseless as well.
The Gujarat Assembly Elections especially farmers from Saurashtra gave a clear signal to the Govt that the rural votes cannot be neglected. The Agrarian Crisis needed to be addressed and FM Arun Jaitley seems to have taken cognizance of this in this #Budget2018. According to FM’s budget statement, The Minimum Support Price (MSP) of crops is to be set at 1.5 times the input cost to ensure minimum 50% return on farming. This is a laudable step towards addressing the concerns of the farmers where in many cases it was even difficult for them to get back the input cost after selling the farm produce.
Coming to the corporate sector, the #Budget2018 had a big announcement. The income tax for companies with annual turnover of less than Rs. 250 crore is lowered to 25% from the existing rate. In last year’s budget, the government had reduced the income tax for small companies with an annual turnover up to Rs. 50 crore to 25%. This move is expected to benefit almost all of the micro, small and medium enterprises (MSMEs) according to our FM.
For senior citizens, the #Budget2018 introduced exemption of interest income from Fixed Deposits of upto Rs. 50,000 from the existing Rs. 10,000. The FM also announced its ambitious Ayushman Bharat project to provide health insurance to 10 crore families of upto Rs. 5 lac cover. This definitely is a huge step closer towards a larger Universal Health Scheme (right now this is not UHS since it does not cover every citizen). But the absence of details of this project has left many questioning its feasibility. The allocation of Rs. 2000 crore to cover 50 crore citizens gives us a figure of Rs. 40 per person premium (i.e. Rs 200 annual premium for a family of 5 members). It has not yet been clarified who these insurance players will be and whether this Rs 200 premium is enough for a Rs. 5 lac cover when the general public is paying approximately Rs. 20,000+ for the same cover today. It also needs more clarification on how the govt is going to identify these 50 crore beneficiaries and regarding the capping of sum insured for various diseases, critical and non-critical. It also largely remains vague right now whether Ayushman Bharat project is going to obviate the need of a personal health insurance paid from our own pockets since the Govt has not modified the limits of section 80D which basically provides tax deduction on medical premiums. Hence, it can be speculated that a salaried middle class tax payer will still have to pay for a personal health insurance even after this scheme.
Lets come to the main point of this article. The cause of disappointment and anger among the salaried middle class tax payer for this #Budget2018 comes mainly from following two issues –
- No change in tax slabs as promised before 2014
- Introduction of 10% LTCG over Rs. 1 Lac capital gain
Talking about the first, Mr. Arun Jaitley had demanded before the 2014 General LS Elections that the Income Tax slab must be raised from the then Rs. 2 lac to Rs. 5 lac. This can be read here. The argument presented by Mr. Arun Jaitley that time in support of his demand was that the savings in the pocket of ordinary citizens will lead to increase in purchase which will lead to increase in VAT and Excise Duty thereby increasing the revenue. While VAT and Excise Duty have been replace with GST today, but his argument of 2014 still holds valid even in GST regime. More the citizens have money in their hands, more purchasing power they get and this in turn leads to increased revenue from GST to the government.
The same Mr. Arun Jaitley is Union Minister of Finance in this NDA Govt led by PM Narendra Modi and has presented all the Budgets of the Modi Govt till today. While it is appreciated that the IT slab has been increased to Rs. 2.5 lac, it is still far from what Mr. Arun Jaitley was demanding when he was in opposition. Add to that now he is already declaring that he has “done enough” for the salaried middle class tax payer in the previous budgets. This not only disappoints the common tax payer, but also gives a glimpse of the arrogance and a sense of being cheated on the election promise of 2014. The opposition has already been addressing the current Govt as “Jumle-wali Sarkaar”. And the FM is further proving them right when he says enough has been done for salaried middle class.
Moving on to second point, the idea of taxing Long Term Capital Gains (LTCG) was widely speculated since last few years. If not taxing, then at least changing the time period in the definition of Long Term from 1 year to more was discussed at some point or other. But lets be honest, no one was expecting LTCG to be taxed in this #Budget2018 as this was expected to be a populist budget. Taxing of LTCG has a huge and wide impact on the salaried middle class which I think very few are talking about. Yes, I am talking about equity-oriented Mutual Funds (MFs). The year 2017 saw sharp surge in Mutual Fund inflows at record Rs. 1.3 lakh crore. You can read about this here.
The reason attributed to this surge was because of lackluster returns from other investment options like FDs, real estate and gold. We all must have seen many informative advertisements related to this with tag “Mutual Funds – Sahi Hai” to educate and encourage the common citizen about investing in MFs. Just when the salaried middle class started investing in Mutual Funds more than ever, the introduction of LTCG tax is forcing them to rethink this decision.
A common mode of investment in MFs used by middle class is via Systematic Investment Plans (SIP) wherein a monthly investment of a mere Rs. 500 can accrue into a huge kitty further compounded annually. Hence, MFs have started becoming popular long term investment instruments in which even housewives are investing these days with an aim to create kitty of money for various purposes like daughter’s wedding, a house, or kids’ college education.
Lets consider an example of a 30 year old salaried middle class tax payer who earns Rs 40,000 per month. Assuming that he starts SIP of Rs. 10,000 today with the target of saving money for his daughter’s wedding when she is 21, a simple calculation of returns on SBI Mutual Fund website after applying very conservative rate of return of 15% (MFs have been known to give returns which are upwards of 18%) will give you the amount he expects to get 21 years later, which is as below –
His total investment amount with an SIP of Rs. 10,000 per month over 21 years comes to approx Rs. 25 lakh 20 thousand and the kitty formed at the end of 21 years is approx Rs. 1 crore 77 lakh. Now according to the LTCG tax introduced by Mr. FM in this budget, he has to pay 10% tax on this after applying the Rs. 1 lac deduction that the FM has offered while calculating tax on LTCG. So the taxable LTCG comes to Rs. 1 crore 76 lakh and the person has a tax liability of Rs. 17 lakh 60 thousand. Huge right? It seems this aspect of LTCG has been totally ignored y the policy makers or they have been greedy after looking at how much a salaried middle class tax payer will get someday in future. Let’s not forget that the person was saving up for his daughter’s wedding with the money which was left after paying all taxes on his income legally and the risk he was taking since “Mutual Fund investments are subject to market risks”.
Apart from hitting the middle class tax payer really hard, another ramification of this tax on LTCG is on ELSS as tax-saving instruments under section 80C deduction. ELSS are quite popular among salaried class since they carry least lock-in period of only 3 years as compared to other 80C investment options and also the returns at the end of 3 years were tax-free since LTCG wasn’t taxed. But now the returns of ELSS will also be taxed at 10% making them not so popular section 80C deduction instruments anymore.
While the salaried middle class tax payer is extremely disappointed due to the above mentioned reasons, the statements coming from FM Arun Jaitley and Finance Secretary Mr. Hasmukh Adhia which are almost arrogant, are only acting as catalyst to turn this disappointment into anger. One twitter user Abhijit Iyer-Mitra even reminded us of the similarities in justifications of the current Finance Secretary and Pakistani General Zia-ul-Haq in 1978.
'Enough done in past Budgets': Jaitley defends no relief for middle class https://t.co/D6BzKPmtpT #BudgetWithBS pic.twitter.com/5hOKTSHEKj
— Business Standard (@bsindia) February 2, 2018
Gen Zia ul Haq on 2nd December 1978 introducing Islamisation “thank Allah for any increase or decrease in your wealth” ….. disgusting abdication of responsibility citing religious humbug pic.twitter.com/wU4EjUmqnf
— Abhijit Iyer-Mitra (@Iyervval) February 3, 2018
That he is finance secretary & retains his job inspite (or because) of this statement tells you all you need to know about this government’s unfailing ability to pick unusually dimwitted dolts from a pool of idiots https://t.co/EEY8aA0C6X
— Abhijit Iyer-Mitra (@Iyervval) February 3, 2018
Dear Adhia, (IAS)
Since you say Stock market gains don’t require any efforts, pls invest all Govt money in Stocks & let it grow effortlessly.
&
Stop tax, charge, cess since it won’t be needed anymore.Thanks pic.twitter.com/bPQCamoK0r
— Ishkaran Singh Bhandari (@ishkarnBHANDARI) February 4, 2018
Posts of disappointment and rebellion against Modi govt’s policies have started circulating on various social media platforms where even the staunch middle class supporters who voted Modi Govt to power in 2014 are feeling cheated due to lack of adhering to the promises. They are even complaining about the demonization they are being subjected to by the people in the Govt as well as unofficial supporters who say middle class is cribbing about taxes. But the reality is very different. The cribbing about taxes argument doesn’t hold true since the taxes are already being paid by the same people since forever. They are only frustrated because little is being done to increase the number of tax compliant population and more towards generating additional revenue from the existing tax payers. The frustration in middle class is also gaining because the Govt seems to be obsessed with generating revenue by taxing ONLY middle class.
Opened Whatsapp & found even staunch defenders of Govt laughing at how middle class has been treated. This was the Most Gung-Ho class in Voting BJP in 2014.
When supporters start laughing helplessly…..Ominous Signs!
— Ishkaran Singh Bhandari (@ishkarnBHANDARI) February 2, 2018
If we all remember the past #Budget2016, FM Arun Jaitley had announced introduction of tax on withdrawal of money from Employees Provident Fund (EPF) and there was huge furor over it by the salaried class. The protest was so much that the FM had to rollback his decision to pacify the growing resentment and rebellion. You can read about this here. This in fact was a huge embarrassment to FM Arun Jaitley, if you think about it. Rolling back a financial policy because the countrymen did not agree with your opinion really damaged his credibility as FM who is connected to the common man. It only floated the idea that the FM is cutoff from the ground realities and does not understand the woes of the common middle class tax payer. It seems with introduction of LTCG tax and failing to keep up to his own word in this #Budget2018, he has only strengthened the perception of his disconnect with the common salaried tax payer class.
At the end of the day, the Modi Govt needs to understand that there is a growing perception in the mind of honest salaried middle class that its a crime to earn money in NDA govt. It definitely needs to be addressed. While Modi Govt came to power with the slogan of “Sabka Saath, Sabka Vikas”, the #Budget2018 doesn’t reflect this ethos at all. It only gives an impression of “Middle Class ke Tax ka Saath, Kisan aur Corporate ka Vikas”. Not everyone is poor and not everyone is rich. There are people in the middle who neither ask for freebies from Govt, nor do they live a luxurious life. Their only demand is that let us earn money with dignity. Someone had truly said that the real minority in our country are the honest salaried tax payers.
While all this is true, the real question summing up this whole article was asked by Ms. Shuchi Singh Kalra – “Why can’t BJP be populist when required?”
My only question for today is – why can't BJP be populist when required?
— Shuchi Singh (@TheShuchiSingh) February 1, 2018
