By Sujit Bhar
Immediately after Finance Minister Nirmala Sitharaman read out her speech for the Union Budget proposals on February 1, a meme started doing the rounds on social media. It went something like this: “Great that the finance minister has announced that there will be no income tax up to an income of Rs 12 lakh per annum. Now we have to think of how to earn that kind of money.”
It sounds funny, for sure, but it also tells a deeper story of where the general employment and spending power of the country is today. Frankly, the Rs 12-lakh per annum income tax-free category—this incorporates the Rs 75,000 standard deduction—will bring into its fold very few.
Minister of State for Finance Pankaj Chaudhary has reported an increase in filing ITR with over 8.09 crore income tax returns having been filed in fiscal 2023-24, up from over 7.4 crore in 2022-23. But there is a catch: not only does this represent only 6.68 percent of the population, but within that number nearly 4.90 crore individuals have reported zero taxable income. This too is a significant increase from the 4.64 reported in 2022-23.
That means 4.9 crore individuals are anyway out of the ambit of the tax-free Rs 12 lakh per annum largesse of the finance minister. We are, therefore talking about 3.19 crore individuals who have reported any taxable income, and of that a significant portion anyway remain in the lower brackets. As per back-of-the-envelope calculations, just over 1 crore individuals may benefit from this move.
The much talked about tax largesse, therefore, turns out to be no more than another jumla. The basic problems of the people, of rising prices, of choking indirect taxation in the form of GST and a depleting manufacturing sector have hardly been addressed.
No Shortage Of Revenue
The irony in this so-called tax largesse that has not been grasped by all is the fact that despite these changes in tax slabs, income tax’s share in gross collections is expected to rise. The government expects to earn Rs 14,38,000 crore through the income tax route in financial year 2025-26 and, despite the refrain that Indians pay little income tax, this constitutes 33.7 percent of the gross tax collections for that year. This is an increase of more than one percentage point from the previous year (Rs 12,57,000 crore or 32.6 percent).
Compare this with other forms of tax collections:
- Corporate taxes are expected to be at Rs 10,82,000, or 25.3 percent of the gross tax collections. This should show a 0.1 percent point decline.
- Goods and Services Tax is expected to bring in Rs 11,78,000 crore. This should be 27.6 percent of the gross tax collections.
The other taxation avenues, such as union excise duties, customs and wealth tax would form 13.4 percent of the gross tax collections.
The Small Businesses
There was a section of the speech which talked about micro, small and medium enterprises (MSME) and on how the government wants to help this sector. It must be remembered that the unorganised sector of the country gives 45 percent of production, while employing over 80 percent of all employable individuals.
What the government has proposed through the budget documents is a hike in investment and turnover limits for the classification of MSMEs. Currently, there are over 1 crore registered MSMEs in India, which employ 7.5 crore people. The new classification says any firm with investment up to Rs 2.5 crore and turnover under Rs 10 crore will be classified as “micro”, a company with investment up to Rs 25 crore and turnover up to Rs 100 crore will be classified as “small” and a firm with investment up to Rs 125 crore and turnover under Rs 500 crore will be classified as “medium”.
For the micro sector, this reclassification will mean little. For small and medium enterprises higher efficiencies of scale, technological upgradation and better access to capital might be possible, as Sitharaman said. For much of the micro sector, however, it is not just access to capital which is a problem.
The entire government machinery, plus banks and financial institutions, have been geared to provide hurdles to this section of MSMEs. If orders are available, there is no machinery that guarantees timely payment, while the banks keep hounding the micro organisation owners. There is no workable legal framework in place for redress.
While Sitharaman says that these changes will help this sector grow and provide more employment, there remains little hope while the complex GST system keeps prices of raw materials high and the input system barely working.
The Make In India Rejig
The fact that the government’s much touted Make in India programme has failed to take off has, probably, finally reached the upper echelons of the finance ministry. The government may have also realised that its own policies have virtually killed one of the best industrial sectors of the country —one that was once touted to be the best in Asia and one of the most robust in the world—the footwear industry.
Strange biases have virtually wiped out vast swathes of industrial landscape, across Uttar Pradesh, especially in Agra and in areas across Kanpur, with tanneries being shut one after another. Footwear and the leather sector, which were once mostly export oriented, started shifting towards imported leather till cost inefficacies virtually put an end to that as well.
These are two sectors which are largely labour intensive and with the closure of tanneries and footwear companies, thousands upon thousands lost their jobs. If the government’s desire to (again) make India the global hub of these two sectors holds any water and if proper action is taken towards this, then it will reopen a major employment avenue.
If the Make in India programme is to have any teeth, then these are sectors that the government must identify and concentrate on. These not only use the natural advantage of the existing talent pool within the country, but also allow existing infrastructure to upgrade and match other South Asian countries that have made the best of India’s strange political biases, creating world class footwear, geared towards export.
Overall, as it transpires, the tax-free Rs 12 lakh comes out as a jumla. The fundamentals of the Indian economy are far more complex than the boosting of the purchasing power of a very small percentage of its populace. The budget has addressed a small section of the economy, while the others are expected to grow in the wild, for now.