Can the 2024 budget meet the expectations of a restless middle class?

Union Finance Minister Nirmala Sitharaman will present the first budget of Modi 3.0 on July 23. There is already much debate about whether this budget will bring anything new. The middle class, in particular, has a lot of expectations, especially regarding tax cuts and reforms to simplify the tax process.

The importance of the middle class

The Indian middle class currently constitutes about 31% of the total population and its share continues to rise. It is worth noting that a majority of voters from this category have supported the Bharatiya Janata Party (BJP) since its inception. In fact, in recent times, this class has played the role of kingmaker, giving parties that extra boost to cross the halfway mark. In 2004, for instance, while the middle class turnout had declined by 18%, the Atal Bihari Vajpayee government suffered a crushing defeat. In the recently concluded general elections, as much as 35% of the middle class supported the BJP-led National Democratic Alliance (NDA), three percentage points lower than in 2019. At the same time, the Congress’ vote share among this class has increased by two percentage points since the last elections.

At Rs 10 lakh crore, the middle class accounts for the majority of the government’s tax revenue. Moreover, not more than 3% of the population pays taxes – most of them middle class – and they bear the entire tax burden. The value of personal income tax collected is higher than that of corporate tax. In other words, the middle class pays more tax than all the companies put together, and it is on them that the government relies to fund its capital expenditure and social programmes. This is unsustainable in the long run for a middle-income country like India, whose per capita income is around $2,500.

Long-awaited relief

Not so long ago, in the 2010-11 financial year, corporate tax revenues were twice as high as personal income tax revenues. Ten years later, in the 2022-23 financial year, the two have become almost equal. Since then, personal income tax revenues have been budgeted to be higher than corporate tax revenues. But while the corporate sector received a major tax break in the 2019-20 budget with a reduction in the tax rate from 30% to 22%, personal income tax has not seen such changes since 2012-13. Deductions have not changed for years and have not even been adjusted for inflation. The Centre introduced a new tax regime with higher slabs in the 2020-21 financial year, but did not provide for any new deductions.

In India, the middle class has no social security, except when they work in government jobs. Most education and health facilities are fee-based, and government hospitals and schools are often of poor quality. The middle class is worried, and many are beginning to wonder what they are getting for the high taxes they pay. Corruption and the free education policy have only exacerbated these concerns.

India’s Tax Structure

Indian tax structures also differ from those in other countries. In Singapore, for example, there is no TDS (tax deducted at source) on salary income. The taxpayer has 12 months after the assessment to pay the tax. Moreover, the first SGD 20,000 (Rs. 12.4 lakhs at current exchange rate) is tax-free.

Then there is the issue of tax brackets. India’s top tax bracket of 30% applies to much lower incomes. In China, on the other hand, the 30% tax rate applies from CNY 420,000, which is over Rs 48 lakhs at the current exchange rate. In Russia, all income is taxed at 13%, less than half our top rate. In the US, income above Rs 10 lakhs and up to Rs 39 lakhs is taxed at just 12% for a single taxpayer.

India, on the other hand, has a unique situation: individual incomes above Rs 15 lakhs under the new tax regime and Rs 10 lakhs under the old tax regime are taxed at 30%. At the same time, corporate incomes worth millions of rupees attract only 22% tax, after deducting expenses. Moreover, while corporate income is taxed on profits (after deducting expenses from income), individuals are taxed on income (salaries, professional fees, etc.), with no deduction available for expenses incurred in earning income under the new tax regime.

Stimulate consumption

At a time when consumption is on the decline, it is important to encourage the middle class to unleash its animal spirit. The middle class contributes not only to income tax but also to GST collection in India, as they consume a large portion of goods and services.

The NDA government is therefore expected to cater to the middle class, especially since four states will go to polls later this year. This class expects substantial relief, not mere cosmetic changes. It remains to be seen how the finance minister will handle this difficult fiscal situation.

(Amitabh Tiwari is a political strategist and commentator. In his previous avatar, he was an investment and merchant banker.)

Disclaimer: These are the author’s personal opinions.

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