A few weeks ago I had written about the new rule that makes PAN (permanent account number) cards necessary for making mutual fund investments. This is something that came up while I was trying to facilitate some savings by someone who works as a domestic help. I'm so used to the idea that everyone’s first investment must be in Section 80C that the fact that this person didn't have a taxable income and would therefore derive no benefit from any tax-break investment got me thinking. For the first time, I saw clearly that in a country like India, where most of the billion human beings earn too little to pay any tax, there's a deep injustice built into the way the government offers tax breaks as an incentive to save.
Everyone knows that those who pay personal income tax are eligible for a deduction from their taxable income of up to Rs 1 lakh if they invest this money in a set of investments that are designated for the purpose. For people who invest this much, this often works out to a saving of Rs 30,000 since they are often in the highest tax bracket.
This tax break is nothing but an incentive to save. Essentially, the government is willing to forego at least Rs 30,000 of revenue for every individual in the highest tax bracket. But this savings-encouragement subsidy is only given to the richest 2 per cent of Indians--the ones who have enough money to pay taxes. For, if you leave all pre-conceived notions aside, you’ll realise that there’s no connection between paying taxes and getting a savings subsidy. To me, there doesn’t appear to be any just and fair reason why the government is willing to subsidise my savings but not that of the domestic help who works in my home.
Of course, the sad fact is that a huge number of Indians are, too, desperately poor to save anything at all, regardless of whether there are any incentives to do so or not. However, I think that there are a large number of people who are below the taxation point but way above absolute poverty and have enough money to save a little bit provided there is some clear incentive. I think that the savings subsidy that the government gives only to the rich should be extended to the poor as well.
Here’s one idea on how this could work. Anyone who saves money and deposits it in a pension scheme should get an incentive amounting to perhaps 10 per cent of the amount saved. There could be a limit of, say, Rs 1,000 a year on this incentive. Since the money is in a pension scheme, it is absolutely locked away till the age of 58.
Since as a reader of this newspaper you're unlikely to be in the class benefiting from this incentive, you will probably immediately object that this just amounts to giving away money. I don't buy that. As I've already pointed out above, the government is, effectively, already giving away money to encourage you to save. Why shouldn't people poorer than you also get the same benefit?
I doubt whether the scale of this incentive would be too large to be financed. A reasonable back-of-the-envelope estimate could be that perhaps two crore families (with an average of five people each) would have enough savings potential to utilise this scheme to the fullest. That's an expenditure of Rs 2,000 crore to encourage a savings net for a significant proportion of the country's population. And in any case, the money is not really an expenditure since if Rs 2,000 crore a year is given out at an incentive rate of ten per cent it really means Rs 22,000 crore flowing into development through the pension scheme. That would certainly generate enough additional economic activity to compensate for the original expense.