Budget 2017: Opportunity to partner with common man to boost national growth

Bhargavi SridharanThis budget generates more curiosity than usual as it comes after demonetisation which removed 86% of currency in circulation and just before the elections in five states with 1,600 lakh voters, an estimated 20% of the country voting. This is also the first budget where the railway budget will be merged with the union budget. No wonder, there is tremendous hope, belief and demand that Budget 2017 soothe the pains of demonetisation.In Nov 2016, there was rampant speculation that income taxes would altogether disappear and instead be replaced with a banking transaction tax. But in recent weeks, that rumour seems have to have vanished and has instead been replaced with a variety of other ideas. In this context, what could be the common man’s wish-list, that also make sense at a macro-economic level? 1. Increase avenues to earn a safe interest: TDS on NBFC deposits are at Rs. 5000, whereas for banks it is Rs. 10,000. Why this discrimination? Often, NBFCs pay a higher interest rate than banks. This would be good time to encourage investors to support NBFCs as well and bring the TDS on par with interest paid by banks on deposits.2. Make NPS more retirement friendly:Government introduced Sec 80CCD, which gave Rs. 50,000 tax deduction (over and beyond the Rs. 1.5 lakh deduction provided by sec 80C). Yet, it hasn’t taken off the way it should have. The reason is perhaps, because the scheme is EET, i.e it is taxed on withdrawal (except on the amount which is used to buy a pension – and at least 40% of the accumulation has to be used to purchase an annuity). It would be a great idea if the government makes the scheme EEE, and the final withdrawals at age 60 were tax exempt. This would let the NPS realise its true potential. 3. Pensions of senior citizens should be made tax freeRemove taxation on annuity earned after the age of 60 or 65. Annuities are anyway paid out at a rate of 5-6%. And this income is currently taxable in the hands of the recipient. Why tax the retirement income of senior citizens, who anyway struggle to keep up with inflation? While the rest of their income could be subject to tax-slabs, exempting tax on pension, would explicitly encourage more Indians to buy pension products. 4. Increasing and widening tax slabsReducing tax slabs as a whole would be very welcome move and a very clean approach. The new tax slabs could be: Rs. 0-10 lakhs- no tax; Rs. 10-20 lakhs: 10%; Rs. 20-50 lakh: 20%; and Rs. 50 lakhs and above: 30%. Eliminate all deduction, allowances and other sections. The tax slabs proposed here are far more ambitious than what most people would dare to suggest, but this will be a simple approach and make administering and filing tax a simple exercise. As the tax burden reduces, even those who currently don’t pay taxes, would rather pay taxes and enjoy peace of mind – it would bring a large part of the black economy into the formal one. 5. Increasing the deduction limit for various allowancesIt is unlikely the government, will follow suggestion number four, because removing deductions and allowances will negate the government’s ability to micro-manage and dictate our behaviour. Hence it makes sense to seek incremental improvements. And in times of rising inflation, there is certainly merit in this.a. Increase the standard deduction from Rs. 2.5 lakh to Rs. 3 lakh: The last revision in standard deduction was in the year 2014, and adjusted for consumer price inflation over the last three years, this stands at Rs. 2.96 lakh today. So this demand is well justified.b. Increase medical reimbursement to Rs. 50,000 and extend it to the self-employed also: Medical reimbursement of Rs. 15,000, was last revised in 2001. In the years since, inflation in medical costs have been significant. Medical insurance (which the government encourages by deduction u/s 80D) do not cover the costs of out-patient and ailments small and big that don’t require hospitalisation. Medical insurance also does not exhaustively pay for all expenses – co-payment, deductibles and cost of non-medical supplies are excluded. Families incur large costs for small children – because of immunisations and also because they frequently fall ill. Diabetes, blood pressure and medical costs of aged parents are also to be borne. This deduction should be increased to at least Rs.50,000. This plea has fallen on deaf ears for several years now. Let’s hope this year is different. And why not extend this benefit to the self-employed as well? They are people too!c. Revising and simplifying LTA: From a national perspective, it would encourage tourism industry and help Indians also tour incredible India. From the perspective of individuals, today more Indians than ever before are migrants, and this would subsidise their trip back home. Travel is also aspirational for the millennial population and encouraging travel within India would improve understanding of the diversity that is India, among Indians. So simplifying rules, allowing multiple destinations, without paternalistically prescribing the shortest route, public transport, etc, would enable better utilisation of LTA deductions. Instead of micro-managing the holiday, the only thing that government should ensure, is that the travel actually happens and additionally mandate that the bills should not have been settled in cash, but by electronic modes. d. Home loan mela: Home loan principal repayment deductions kick-in only after the property is handed over. Home loan interest paid during construction can also be claimed only after possession is received. Rather, these deductions should be permitted as soon as home loan repayment commences, as at this time the individual is under tremendous financial stress – paying both EMI and rent. At this juncture, permitting income-tax benefits will be a huge breather to the borrower. Increasing, the home loan interest deduction from the Rs. 2 lakh (for self-occupied property) and providing a separate deduction for home loan principal repayment, rather than clubbing it under 80C (which can instead focus only on financial assets) will help borrowers. It will also support the ailing real estate industry and improve credit offtake at banks, which is at an all-time low. e. Link 80C deductions to income levels & incentivise saving: Household savings rate have fallen to lows. So, why not encourage savings and link savings to percentage of income? Rather than capping 80C deductions to Rs. 1.5 lakh, the Govt should encourage everyone to save more – capping it, say, at 30% of gross taxable income. After all, savings to GDP ratio impacts credit rating of the Govt. It also determines the amount of money that the country can invest into productive assets and infrastructure. So, this benefits the economy as whole, as much as it benefits the common manBhargavi is founder of www.finmitra.com an online investment services firm.