As the government kicks off its Budget-making process unusually early this time, the outlines of its tax philosophy point to a strengthening of the middle class through exemptions and allowing the poor to get out of the tax net.
At the same time, the government’s approach seeks to fight the taint of tax terrorism by not pursuing retrospective demands against companies and simplifying the process for both companies as well as individuals, who may have to soon fill just half-a-page form.
The middle class can be strengthened through incentives to buy a house or car, put children in school, save for old age, and to invest in insurance, pension fund, and provident fund.
“It suits the country to strengthen the middle class and let the poor get out of the tax net. The more money we can put in their pocket, the better it is. That increases the country’s purchasing power, giving it immunity from global turmoil,” said a top government functionary, who didn’t want to be identified.
An increase in consumption ensures there is not much net loss of revenue, as indirect taxes make up for some of the losses incurred through income tax relief. Savings put more money in physical assets, as well as in insurance and pension funds, which are long-term investments. Even if the savings are kept purely in financial assets, they provide a buffer against adverse economic conditions.
“In a society like ours that is largely uninsured and pension-less, it is important to create social security measures,” said the official.
This tax approach fits in with what finance minster Arun Jaitley wrote in a Facebook post on October 3: “It has been a conscious strategy of the NDA government to put more money in the pockets of middle and low income groups.”
The approach to companies is equally benign. The government is unlikely to chase retrospective taxation against them. The ticklish issues are cases in which assessment orders have been issued already as it is difficult to withdraw them.
In the last Budget, the government abolished wealth tax, which was proving to be an “unnecessary drag.”