THE INDIAN economy is experiencing a significant upswing, buoyed by robust macroeconomic fundamentals and corporate tax cuts that have enabled corporations to pare down debt and enhance earnings. Real GDP for financial year 2023-24 is estimated at 8.2 per cent, compared to 7 per cent the previous year. This economic vitality is mirrored in corporate India, where the profit-to-GDP ratio for Nifty 500 companies has climbed to 4.8 per cent in 2023-24, a substantial rise from 4 per cent in the preceding year and a stark contrast to the 2.1 per cent observed at the pandemic’s end. We are nearing the historic peak of 5.2 per cent observed in 2008. Corporate India is booming.
Furthermore, our internal analysis reveals an optimistic financial landscape for corporates—the median ‘net’ debt to equity ratio stands at 0 for large caps, with midcaps and smallcaps demonstrating even more favourable conditions with ratios of (-)7 per cent and (-)4 per cent respectively, indicating that they have more cash, on average, than debt. While this can be partially attributed to the insolvency and bankruptcy code, which weeds out bad borrowers, it is also the result of robust corporate earnings.
While corporations are prospering, the income taxpaying middle class is taxed harshly. This is evident as personal income tax collections have, for the first time in the country’s history (excluding the pandemic year of 2020), surpassed corporate tax collections. The shift has been significant: in 2014, the ratio of corporate tax to personal income tax was 162 per cent, but it has now dropped to 99 per cent. If the 2014 ratio had been maintained, personal income taxpayers would collectively have paid ₹3 lakh crore less in taxes.
This Budget has done little to rectify this imbalance. First, what was good: the standard deduction has been increased by ₹25,000 to ₹75,000; minor changes in tax slabs makes for savings of approximately ₹17,500 per year.
This minor improvement has been outdone by more significant changes in other parts of the tax code. Short-term capital gains have been increased from 15 to 20 per cent. More importantly, long-term capital gains (LTCG) have been set at 12.5 per cent, but any indexation benefits derived from it have been removed. The cut in indexation impacts real-estate investments.
Consider the following example: you buy a property for ₹15 lakh and sell it eight years later for ₹25 lakh. Under the old regime, with an average inflation rate of 5.5 per cent, your purchase price would adjust to ₹23 lakh. Therefore, you would have to pay an LTCG tax of 20 per cent on the capital gain of ₹2 lakh, resulting in a tax liability of ₹40,000. However, without indexation, your capital gain would be ₹10 lakh, leading to a tax liability of ₹1.25 lakh, three times higher than earlier.
For equity market (and mutual fund) investors, the increase in capital gains taxes, both short and long-term, might still be justifiable in the act of normalising tax rates across asset classes. But it pinches when it comes after a large bull run.
The two other asset classes affected by recent tax changes would be debt and real estate, both of which are traditionally considered ‘safe’ investments. Debt instruments, such as bonds and fixed deposits, and real-estate properties are often favoured by investors seeking stable and low-risk returns. However, without the benefit of indexation, the tax liability on gains from these investments has significantly increased. Debt mutual funds were hurt in 2023, and in 2024, it is real estate—both of which are relatively less volatile investment avenues.
Personal income tax collections have, for the first time in the country’s history excluding the pandemic year of 2020, surpassed corporate tax collections. The shift has been significant. In 2014, the ratio of corporate tax to personal income tax was 162 per cent, but it has now dropped to 99 per cent
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The Budget, however, equates asset classes in terms of tax. Real estate, REITs, and stocks are all taxed similarly in the long term, at 12.5 per cent tax, and the holding period is either 12 months or 24 months. The lack of indexation reduces calculation complexities in tax filing, and eventually, the asset class making a higher return will now be similarly comparable.
Still, taxes to the middle-class have risen across the board:
– Capital gains on stocks were introduced after a decade in 2018, at 10 per cent, and are now at 12.5 per cent (long-term) versus 0 per cent before 2018
– Gains in debt mutual funds are taxed as income at slab rates (going up to 39 per cent) versus being taxed at 20 per cent after indexation earlier
– Dividends were not taxed in the hands of investors, now they are
– There is a TDS on dividends and interest received from bonds, versus none earlier
– Income tax for individuals was increased from 30 per cent to as much as 39 per cent based on higher income slabs
– There is now a tax deducted at source during a house or car purchase, luxury goods and a large tax on foreign travel expenses
– Deductions offered a decade ago have the same limit today, though incomes have increased by nominal GDP levels. This leaves more income taxed with the deductions becoming less relevant
– Securities transaction tax (STT) was created in 2004 to allow capital gains to be exempt from tax; but now we pay STT, and capital gains tax continues. And STT has also been increased.
In what has been a relief, companies pay only 25 per cent tax (down from 34 per cent) and in Budget 2024, customs duties on gold have been cut to 6 per cent from 15 per cent. The reductions are few and far between, while the increases come in different forms every year.
The idea seems to be that individual taxation will remain high, while corporate tax (which is paid after expenses) is way lower.
There is a ‘new tax regime’, which offers different tax slabs if you choose a no-deduction system where you are not allowed any of the deductions, such as insurance premium, rent, housing loan principal, etc. Regardless, even that regime seems incredibly narrow—the lowest tax slab is effectively ₹7.75 lakh (below which you pay no tax) and the highest income tax slab is ₹15.75 lakh (above which you pay 30 per cent tax). This is a very narrow corridor in which around five slabs exist.
In what is perhaps a good thing, the fear of a change in the form of inheritance/estate taxes or taxes on gifts has not materialised in this Budget. However, the structure of personal taxation is such that there are hardly enough complaints demanding the government to reconsider. In an exceptional situation in 2016, when the government attempted to tax withdrawals from the employees’ provident fund balances, there was enough furore for it to withdraw the proposal. But that perhaps incensed the large number of government employees affected by the change; given that some of the recent tax increases may not disproportionately impact government employees (who may not have that much in terms of capital gains or mutual funds), there is no concerted call for a rollback on any tax increase.
Usually, the problem is this: we pay all these taxes, and get terrible roads, no running water, electricity cuts, long legal waiting periods and, in general, arbitrariness of bureaucrats who have become the system. To mitigate this, we have costs to bear: we buy sump tanks to store water, we buy RO filters to make that water drinkable, we have inverters and generators to avoid the power cuts and we pay our way out of the arbitrariness even when abhorrent. The taxes then hurt more.
And then, there is a large segment that remains untaxed; rich farmers, for instance, are not taxed. But it is not just farmers; anyone with agricultural outputs is not taxed on income, including listed companies that make, for instance, packaged seeds. Not taxing entities that make hundreds of crores, or rich farmers that sell a crore worth of produce or more, while continuing to tax the middle class seems rather one-sided.
The imposition of differential rates of GST, too, has a layer of arbitrariness. You will pay 5 per cent GST on food, but 28 per cent on air-conditioning. In a tropical country where heat waves are common, the least we could do is to at least accept that air-conditioning will be a necessity. The lessons are evident from Dubai or Singapore
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The imposition of differential rates of Goods and Services Tax (GST), too, has a layer of arbitrariness. You will pay 5 per cent GST on food, but 28 per cent on air-conditioning. In a tropical country where heat waves are common, the least we could do is to at least accept that air-conditioning will be a necessity. The lessons are evident from Dubai or Singapore. Consumption taxes impact everyone, not just people with high incomes, and we should lower the overall impact of these taxes.
It is not like the government was short of cash, either. Very recently, it received a dividend from the Reserve Bank of India (RBI) that was ₹1,00,000 crore more than expected. Tax collections from other sources, such as GST, excise (for fuel) and corporate taxes have also been buoyant. There are other mechanisms, like disinvestments into a strong bull market, which can raise revenues. The government can raise a large amount through disinvestment of public sector banks (PSBs) where their holdings have soared as a result of the recapitalisation process. The benefit of this should have, in some way, gone to the middle-class taxpayer, but hasn’t.
There is another puzzling new concept called tax-at-source, where it is assumed that people spending on what the government thinks is ‘expensive’ things, are somehow evading taxes. So if you buy a house, the buyer must deposit some part of the value to the government as tax-at-source on behalf of the seller. This has moved into tax-at-source for cars worth more than ₹10 lakh, and now on any luxury good that involves a bill of ₹10 lakh or more. Travelling abroad? Pay 20 per cent of everything you spend to the government as tax-at-source. Sending money to your children abroad for their education? Pay 5 per cent tax-at-source. And so on.
Indeed, a tax-at-source is simply an advance payment of tax, and you can claim it back if your actual taxes are lower. But it beggars the imagination that the taxman should take so much money from something as simple as foreign travel. In effect, a person that has finally retired and wants to take that world trip he has worked his entire life for, will now have to find 20 per cent more money because the government thinks he does not pay tax, and he has to wait a year to claim it back. For the aspirational among us who do the right thing, it is almost like the government’s telling you: “How dare you go abroad? Show us some money too.”
One relief in this Budget is that this foreign-travel based tax-at-source can now be adjusted against your salary income. Perhaps the government decided to make it slightly easier on those taking their world trips while they continue to be working—a small but welcome mercy.
Leaving money in the hands of taxpayers, the middle-class ones, would spur consumption and allow for more corporate investment to come in. India is on a growth path that other Western countries are not; we need to both consume and invest, and cannot really depend on exporting to nations that are either ageing too fast, or will not allow us to export to them. Creating a path to higher consumption involves either stable or lower taxes, and for higher investment, a controlled inflation and lower interest rate regime. We have only managed to control inflation in prices, but the real problem now is the inflation in taxes for the middle class.
About The Author
Deepak Shenoy is founder and CEO, Capitalmind, a SEBI-registered portfolio management company
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