Immediate Tax Relief But Long-Term Financial Challenges

Newsreel Asia Insight #292
July 25, 2024

India’s 2024 budget introduces significant fiscal changes, which are likely to reshape the economic landscape for various sectors of society, particularly impacting poorer segments and average taxpayers. The nuances of these expected changes reveal a contrast between immediate relief measures and the broader, potentially more burdensome, tax implications that accompany them.

The budget initially appears to extend a hand to lower-income taxpayers by reducing their income tax obligations, an apparent effort to alleviate some of the financial pressure on this demographic. This reduction could potentially increase disposable income for lower earners, encouraging increased consumer spending which is beneficial for economic growth. However, there are simultaneous increases in other areas of taxation.

One of the more significant shifts is the increase in taxes on investments. This includes both short-term and long-term capital gains, where the tax rates have been raised. These increases could deter individuals from investing, particularly affecting middle-class citizens who might see investing in stocks or real estate as a pathway to financial security.

Moreover, the removal of indexation benefits for long-term capital gains on property stands out as particularly impactful. Without the ability to adjust the purchase price for inflation, taxpayers selling property will face higher tax bills on their gains. This change is likely to cool the real estate market, discouraging both the buying and selling of property, and could inadvertently encourage more transactions to occur under the table, thereby avoiding the higher tax rates.

The budget also heavily impacts those who do not fall under the income tax bracket—predominantly the poorest citizens. Although they do not pay income tax, they are not shielded from the Goods and Services Tax (GST) imposed on almost all goods and services. This indirect tax disproportionately affects the poor, who spend a larger portion of their income on daily necessities now subject to GST. The reality of this tax burden complicates their financial situations significantly, undermining any indirect benefits the income tax relief might have offered to the economy.

In a similar vein, the budget reduces corporate tax rates for foreign companies from 40% to 35%, a strategic move aimed at attracting foreign investments. While this might bolster economic activity and generate employment, this fiscal approach appears to favour international investors and big businesses over the average Indian taxpayer and the smaller local investor.

Compounding these issues is the central government’s reliance on cess collections, which are not required to be shared with state governments. These funds, drawn from specific taxes for designated purposes, such as infrastructure or health, remain under central control, leaving states financially strained and less capable of funding critical local development projects. This is particularly detrimental to efforts aimed at improving conditions for the poor, such as educational initiatives and healthcare improvements.

Therefore, the 2024 budget raises concerns about the equitable distribution of tax burdens and the prioritisation of economic policies that could widen rather than bridge the gap between different economic groups in India.