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Here is how the government can win back the support of Middle Class by tweaking Income Tax slabs

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abhishekifmrhttps://abhishekifmr.wordpress.com/
A Risk analyst with keen interest in Politics, Finance and Energy.

55 months have passed since Modi government was established in May 2014 and 5 more to go with one budget to woo the nation. One of the major supporters for giving a clear mandate to BJP was Urban middle class. Analysis of the results of 3 states election last week showed that a part of these supporters have left BJP camp resulting in a massive 3-0 defeat for Modi ji led BJP.

In my own assessment during last 55 months middle class has received a lot of direct and indirect benefits but somehow these are overshadowed by few things like hike in Excise duty for Petrol/Diesel and increase in Service tax from 15% to 18% in GST.

Direct benefits

2014 2018
Nil (0) tax Upto 2,00,000 (2 Lakh) Upto 2,50,000 for General (2.5 Lakh )

Up to 2,90,000 for Salaried (2.9 Lakh )

Tax on income till Rs. 5 Lakh 10% for 2,00,000- 5,00,000 5% for 2,50,000-5,00,000

5% for 2,90,000-5,00,000

Deduction under 80 c investment 1,00,000 (1 Lakh) 1,50,000 (1.5 Lakh)
Deduction under NPS Rs 0 Rs 50,000

 

Indirect benefits

2014 2018
House Loan rate 10.15% 8.65%
Inflation >10% <5%
New Roads <10 KM per day >28 KM per day
Sanitation coverage 38% 95%

 

In spite of the above benefits the middle class seems disappointed as these benefits aren’t clearly visible and probably meager as per the expectations.

A probability to woo the lost supports could be the possibility of increasing the tax-free slab to 5 Lakh per year.

Recently IT department has released the data for FY 2015-16 & FY 2016-17. Based on this data I tried to evaluate how much it would cost to raise the tax free allowance to 5 Lakh in 2017.

I have created 3 scenarios on the recent most Direct tax data for Individual people:

Existing Slab (2017) Proposal 1 Proposal 2
0-250000 0% 0% 0%
250000-500000 10% 0% 0%
500000-550000 20% 20% 10%
550000-1000000 20% 20% 20%
>1000000 30% 30% 30%

 

  1. Existing tax slabs
  2. Proposal 1: Tax slab of 0% tax till 5 Lakh and retaining 20% and 30% as is.
  3. Proposal 2: Tax slab with 0% till 5 Lakh and 10% from 5 Lakh to 5.5 Lakh.  (Rational for this is that incentive for showing income of less than 5 Lakh would increase if the next  tax rate is 20%. With 10% tax slab incentive will reduce. This phenomenon is common in banking. For example we need to write PAN number if amount is greater than 50,000 so people started depositing 49,000 )
    Slab No. of Returns Sum of Returned Income (in Cr ) Average Returned Income  A: Existing Slab (in Cr)  B: Proposal 1 (in Cr)  C: Proposal 2 (in Cr)
    0 2,78,575 0 0                          –                            –                          –
    >0-<=1,50,000 23,44,222 20,127                    85,858                          –                            –                          –
    >150,000-<=2,00,000 16,07,128 28,536                1,77,559                          –                            –                          –
    >2,00,000-<=2,50,000 34,19,282 78,472                2,29,498                          –                            –                          –
    >2,50,000-<=3,50,000 1,98,94,844 5,93,518                2,98,328                   9,615                            –                          –
    >3,50,000-<=4,00,000 35,36,489 1,32,011                3,73,283                   4,360                            –                          –
    >4,00,000-<=4,50,000 24,07,190 1,02,079                4,24,059                   4,190                            –                          –
    >4,50,000-<=5,00,000 23,66,569 1,12,953                4,77,286                   5,379                            –                          –
    >5,00,000-<=5,50,000 14,73,910 77,323                5,24,611                   4,410                        726                      363
    >5,50,000-<=9,50,000 55,87,610 3,93,491                7,04,221                36,791                  22,822                20,028
    >9,50,000-<=10,00,000 3,34,333 32,599                9,75,046                   4,012                     3,176                   3,009
    >10,00,000-<=15,00,000 16,71,003 2,00,866              12,02,068                31,017                  26,840                26,004
    >15,00,000-<=20,00,000 6,68,652 1,15,088              17,21,194                22,825                  21,153                20,819
    >20,00,000 10,85,307 5,68,904              52,41,872             1,51,678               1,48,965             1,48,422
    Total 4,66,75,114 24,55,967             2,72,603               2,30,393             2,25,205

    The results for the 3 scenarios are:

    1. Existing slabs: Govt would get 2,72,603 Cr and in reality government has actually approximately similar amount (2,73,405 Cr from 4.66 Cr people).
    2. In Proposal 1, GoI would get 2,30,393 Cr only in case tax-free allowance increased to 5 Lakh.
    3. In Proposal 2, (introduction of 10% slab and tax-free allowance of 5 lakh) will make GoI collection to 2,25,205 Cr only.

    Quite a big amount if we just look into the numbers. It would have cost more than 42,000 Cr to increase tax-free amount to 5 Lakh but in Jan 2019 it would not cost that much as Mr Jaitley has already  reduced 10% slab to 5% which effectively means 50% reduction. Other than this we have section 87A which means govt gives rebate of INR 2,500 if taxable income is less than 5 Lakh. However income tax files have increased from 4.6 Cr to 6.8 Cr in 2018 which can increase the amount needed to 25,000 Cr.

    Now the question is, would Mr Jaitley and Mr Modi dole out 25,000 Cr (Increasing fiscal deficit by just 0.13%) to get 11 Cr votes from middle class or will they stick to fiscal consolidation?

    In next series I would explore ways to raise 25,000 Cr to implement this suggestion.

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abhishekifmrhttps://abhishekifmr.wordpress.com/
A Risk analyst with keen interest in Politics, Finance and Energy.
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