A Jackpot for the Middle Class

With three words—democracy, demography and demand—Finance Minister Nirmala Sitharaman unplugged her much expected tax relief measures for the Indian middle class in her Budget speech on Saturday.

By any estimate and expectation, the bonanza handed out was beyond the expectation of most economic observers. Income up to ₹12 lakh, excluding income subject to taxes like capital gains tax, has been made tax free. For salaried tax payers this income will effectively be ₹12.75 lakh if one includes the standard deduction of ₹75,000. Along with this measure came a rejigging of tax slabs. These are designed in a way to give a boost to consumption demand that had been flagging for some time and was held to be a cause of India’s tepid economic growth.

In the process, the government will have to forego revenue of about Rs1 lakh crore in direct taxes and another ₹2,600 crore in indirect taxes.

The reality is that this relief to the middle class was long overdue. In the five years from 2019-20 to 2023-24, personal income tax collection had jumped from ₹4.92 lakh crore to  ₹10.45 lakh crore in 2023-24 (the figure for 2023-24 is provisional). This represents a growth of 112% in personal income tax. In the year of the Covid19 pandemic—2020-21—personal income tax collections outpaced corporate tax collections for the first time in India’s history. Until that point, corporate taxes were the mainstay of direct taxes collected by the government.

After the direct tax proposals were announced there was some criticism–badly misplaced—about these proposals. It is claimed that these proposals will max taxation in India even more regressive than before. Earlier one did not pay income tax until one had an income 2.5 times more than the per capita income. Now personal income tax kicks in only if one earns 6 times the per capita income. But indirect taxes that are paid by everyone continue as before: even the poor pay those taxes as they are levied on consumption.

This is one, jaundiced, way to look at the scheme of taxation. There is another reality as well: the burden of direct taxes, especially personal income tax, falls on a tiny sliver of India’s population. This, too, is regressive. The government, however, is not blind and understood that some tax relief was in order. It delivered what was necessary on Saturday. This is likely to give a boost to the economy, something that will help everyone irrespective of their economic class.

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