Tax changes in Budget 2023 to boost consumption & savings

The budget managed to keep the focus intact on infrastructure, long-term capacity building, and much-needed tweaks to the taxation framework to optimise tax mobilisation.

Given the needs of the Indian economy and the government’s previously outlined economic vision for the next 25 years, expectations were indeed high from Budget 2023. However, there were other realistic aspects like the lingering fiscal impact of COVID-19 relief measures, persisting global inflation in the last few quarters, rising interest rates and slowing economic growth, that kept the expectations in check. In such a situation, the Budget presented by the Finance Minister successfully tread the tightrope and checks all the right boxes.

Most importantly, the Budget has affirmed the government’s resolve to stay on the fiscal consolidation course. Other than maintaining macroeconomic stability by operating within means, the budget managed to keep the focus intact on infrastructure, long-term capacity building, and much-needed tweaks to the taxation framework to optimise tax mobilisation, bring more people into the formal economy and boost consumption and higher savings.

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Strengthening the Economic Bedrock

In line with the last few Budgets, the government’s focus on infrastructure strengthening was expected. What was surprising as well as reassuring was the massive outlay towards capital expenditure – a jump of 33 percent. All pockets of infrastructure like roads, railways and ports have significantly expanded capex plans now. It is proven that a capex boost has a multiplier effect on the economy. The higher efficiency brought through infrastructure development expands services and other business opportunities and boosts the productivity of the economy. Job creation across the country will be another outcome of capex and that will have long-standing benefits.

Long-Term Capacity Building

The Budget also has many softer touches that might not have an immediate financial impact but could gradually change the dynamics for a host of businesses and services. One such development is the steps announced to ease compliance and KYC (know-your-customer) systems. These smaller but impactful changes could lead to a large-scale inclusion of new businesses, users and investors in the financial services ecosystem.

Boost to Consumption and Savings

The Budget also responded to the demand of income taxpayers by reducing the tax liability through the tweaks in the New Tax Regime. The re-organisation of the tax slabs and the move to effectively bring the tax exemption limit to Rs 7 lakh will not only leave more money in the hands of taxpayers but could also boost tax compliance by expanding the taxpayer base. Higher disposable income will not only boost consumption in the near term but could also lead to higher savings and investments in the future. The nudge created for the higher taxpayers by reducing the tax surcharge may also likely boost consumption, savings and investments.

Additionally, the finance minister’s gradual move towards bringing parity in different financial products is also a welcome step. In particular, the changes in taxation to market-linked debentures could nudge more investors to explore debt mutual funds.

The Way Forward for Investors

Indian economy continues to be among the fastest-growing economies in the world. Recent trends suggest that inflation is under control which allays fears of significant rate hikes by the Reserve Bank of India in the near future. Consistently improving credit demand is another bright spot.

With these green shoots and direct and indirect consumption push by the government through Budget 2023, the optimism on the Indian economy and markets continues to be strong. Near-term volatility and somewhat higher valuations notwithstanding, long-term investors should allocate part of their investments to Indian equity in line with their financial goals and risk appetite. Debt mutual funds also continue to be an attractive and tax-efficient proposition for medium to long-term investors with the prevalent elevated yields. Hybrid funds, particularly conservative hybrid strategy, could be an apt choice for investors just starting out in the market and looking to dip their toes in investments.

The Budget has presented a pragmatic approach to achieving holistic and inclusive economic development in the country. Accordingly, its positive impact will be widespread across the economy. Investors should take note of the message from the Budget. Those staying invested in India are quite likely to earn the dividends of this growth story as it evolves.

DP Singh is Deputy MD and Chief Business Officer, SBI Mutual Fund. Views are personal and do not represent the stand of this publication.