Budget questions after the high fives

The number of citizens filing returns but paying no tax just shot up by 10 million.

The headline story of the eighth straight Union budget presented by Finance Minister Nirmala Sitharaman is the significant income tax relief provided to the middle class. Those earning on an average Rs 1 lakh a month now (other than capital gains) will not pay any income tax, and the relief goes up to Rs 12.75 lakh for the salaried class, since the standard deduction of Rs.75,000 stands. With this broad stroke, about 10 million more Indians will not pay any income tax. They will join the large number of Indians who already file income tax returns but pay zero tax. One estimate says that about 50 million of the 80 million filing income tax returns pay zero tax. Adding to this number raises a big question about the directions of the budget and the government. What happens to the stated objective of widening the tax net so that more and more people pay tax and reduce the overall tax burden? Stretched further, the move raises questions about whether the government is reducing the significance of income tax, and writing a tax code that is supportive of the middle class while being anti-poor.

It is a happy sign that the government talks about encouraging voluntary compliance and trust in citizens, and reducing the compliance burden. The minister sums it up in the phrase “trust first, scrutinise later”. Indeed, respect for citizens and trust in tax filers is an important way to boost confidence, increase compliance and value businesses and people who generate wealth and build the economy. Yet, this must be seen against the actions of the government in the recent past, and the impression that the various arms of the government, tax being just one, are put to work on command against select targets. Trust is not achieved when words are different from actions.

An area less critiqued in the budget is the path of fiscal consolidation. For the first time, the budget has outlined a fiscal consolidation path “with an end target but without (an) intermediate target”. The end target is the debt-GDP ratio, but this typically works with the intermediate target of fiscal deficit to GDP ratio. The government now says it will achieve the former without targeting the latter. The aim, it is said, is to equip the government with the requisite operational flexibility to respond to exigencies arising at a time of high uncertainty. What this means is that the fiscal deficit-GDP ratio of 3% will not be adhered to any more. Instead, the deficit will be such that the debt to GDP ratio will be 50 (+/- 1%) by March 31, 2031. Yet, the goals cannot be reached without passing through the requisite milestones. Fiscal experts will have to watch how this plays out. In the budgetary framework, deficit is a residual item from receipts and expenditure in revenue and capital accounts. Prudent fiscal management requires a balanced revenue account and borrowing only for capital expenditure. This means maximising revenue and prioritising spending. The government should enhance tax buoyancy and ensure capital expenditure is self-financing, with returns at least covering borrowing costs. Fiscal consolidation depends on adhering to these fundamentals.

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Union Budget 2025 | Nirmala Sitharaman, as Finance Minister, presented her record 8th Union Budget this time. While inflation has burnt a hole in the pockets of 'aam janata', the Modi govt gave income tax relief for those making up to Rs 12 lakh per year in salaried income. Track the latest coverage, live news, in-depth opinions, and analysis only on Deccan Herald. Also follow us on WhatsApp, LinkedIn, X, Facebook, YouTube, and Instagram.