Blog: Jaitley's Budget Hits The Salaried Hard, But It's Not All Bad News

Is socialism creeping in under the back door? Has Arun Jaitley succumbed to the age-old solution of taxing the rich in order to meet his priorities of uplifting the poor, especially the rural poor? This is something we expected from a Congress government, which at one time had a top tax bracket of 100%.

Okay, Mr Jaitley hasn't gone quite that far, but you can see that in much of what he has done he has tried to tread the path the Prime Minister mentioned in his speech of January 29, when he asked why the better off sections of society were gaining from tax free dividends, among other things, while more subsidy and funding for rural areas was criticized.

The rich will now pay more income tax, they will get taxed on dividends above Rs 10 lakhs, their cars will cost more by 2% to 5%, jewellery sees an excise hike and other luxury items costing over Rs 2 lakhs will be taxed. Of course, most of the industrialists at the NDTV CII Budget programme seemed to suggest that they were happy to pay these taxes if the money went to the cause that it is supposed to go for. That's fine, that these worthy gentlemen will pay their fair share, but as the budget again recognizes, with its multiple offers to get tax avoiders to come clean, most people who make money try and avoid paying high taxes, and more you push up the rates, the more efforts they make to avoid them.

But yes, one has to acknowledge the very strong effort the government is making to try and get people to come into the tax regime, pay their dues and correct any past avoidances. By increasing the turnover limit for small companies from Rs 1 crore to Rs 2 crore for presumptive tax ceiling (and a similar one for professionals) it is trying to encourage more people to pay taxes without pain (read scrutiny of the income tax department). Similarly, the 45% tax on concealed income is another such effort.

Perhaps the greatest sin of this budget is to have hit the salaried class in the solar plexus with a tax on PF withdrawals. It came as an iron fist hidden in an innocuous paragraph that first announced the National Pension Scheme would now have a tax free component of 40% (up from zero) which is a very good thing. It then slipped in the line that PF withdrawals would also have the same 40% exemption. Sounded great, but what it meant was that the 100% exemption people had enjoyed so far was now reduced to 40% with the balance 60% taxable. At tax bracket of 33% this would effectively mean that there is a tax of 20% on the 60%. So if you saved Rs 1.5 lakhs every year for 30 years under the current no tax regime you would have got a sum of about Rs 2 crore, now of that Rs 2 crore you will hand over to the Government of India Rs 40 lakhs. So just when you thought that little nest you were scurrying away would be enough for your needs when you retire, think again. Big brother wants a chunk of that too.

The tragedy is that the salaried class is the only one that the Government can easily pick on. You are taxed at source, you pay service tax, and since you have no black money, you buy goods paying VAT etc. And now they want a piece of your retirement savings.

And if that was not clever enough, the next paragraph in the speech seems to suggest that companies cannot claim a tax deduction for the PF they pay above Rs 1.5 lakhs. That's the socialist brush again. So paying PF for higher wage employees becomes taxable for companies. Well companies will either live with the tax and or find other ways to compensate their employees. Either way the tax is another sleight of hand.

But no, its not a sea of gloom. There is much in the budget to be commended. There is a huge push to improve the lot of people in the rural sector and that is necessary. And while there are the usual promises of more irrigation, subvention of interest on farmers loans, there are some more practical measures which should have an impact. One encouraging policy is to push LPG in rural India. This is not only environmentally friendly by reducing the cutting of trees and smoke from such fires, but will really help women in villages, who first have to collect the wood, twigs and branches, then light the fire and finally cook on mud stoves choking on smoke. The idea of gas for them is an enormously liberating idea and if implemented quickly and efficiently, will make the lives of rural women less of a drag.

The other is the direct transfer of money to the gram panchayats (Rs 80 lakhs each) and small municipalities (Rs 2 crore each). While the sums are not huge, they are a promising beginning and sending the money directly to the end users cuts out the many layers that siphon funds. And while no one can ensure that all the monies will be well spent, there is greater accountability when the guy spending the money is your neighbour rather than some faraway unknown bureaucrat.

The other refreshing idea was, yes, in provident fund, where Mr Jaitley, promised to pay the EPF for new employees at 8.33% for a period of three years. What this pro-labour move seems to be saying to employers is - put people on the EPF (which many avoid for monetary reasons as well as avoiding the hassle of dealing with the Provident Fund inspectors). This could have gone further, by allowing for mobile PF in that part time and seasonal workers would get PF without getting tenure. May be something for the future.

While former Prime Minister Dr Manmohan Singh has criticised the budget for lack of big ideas, that seems a bit unfair given the Congress's record over the 10 years that they ruled before the Narendra Modi government. Their lack of big ideas helped leave us in the financial mess we are in, and is the reason why there is so little money for the Finance Minister to play with, that he is resorting to "socialist" taxation.

In fact, there are many small ideas and steps in today's budget to encourage employment and to improve the climate of governance. If the attempts in the latter actually work, just easier compliance is a big-step reform as it makes it easier to do business.

The big question now is whether parliament will function well enough to pass the Goods and Services Tax bill, the bankruptcy bill, the small medium industries bill and many many more.

(Ishwari Bajpai is Senior Advisor at NDTV)

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