Friday is B-Day, when Budget 2019 will be unveiled. The buzz is that Interim Finance Minister Piyush Goyal's briefcase could throw a nice surprise for the salaried middle-class - an increase in the income tax exemption ceiling from Rs 2.5 lakh.
"We believe while the government will stay tethered to prudence, the balance will tilt in favour of populist measures designed to assuage restless voters who are currently sitting on the fence. We feel that the focus of the government in a populist budget would be to increase the disposable income in the hands of the citizens," said Anirudha Taparia, Executive Director, IIFL Wealth Management.
According to him, there is a very strong case for doubling the income tax exemption limit for taxpayers from the current Rs 2.5 lakh to Rs 5 lakh - something that the CII also listed in its pre-Budget recommendations to the finance ministry. "Some hints for the same can be gleaned from the recent ruling of the government to provide reservation for the economically weaker sections of the society, in which they have defined the weaker section to be any family whose household income in a year is less than Rs 8 lakh," he added.
If this comes to pass, a significant number of Indians stand to benefit. According to The Economic Times, of the 5.7 crore people who file their tax returns, roughly 2.7 crore taxpayers boast incomes up to Rs 3.5 lakh and almost 1.5 crore have an income of over Rs 3.5 lakh. Moreover, this move would directly benefit the middle class, thereby avoiding a possible backlash from this demographic in the upcoming polls. The Modi government is apprehensive of this possibility since it has fallen short of its 2014 electoral promises on jobs and other benefits while demonetisation also took a toll on the middle-class.
However, there are fiscal challenges for government given that raising the basic exemption by just Rs 10,000 is estimated to lead to a tax loss of about Rs 2,000 crore. Rating agency Moody's expects the fiscal deficit to reach 3.4% of GDP in the year ending March 2019, higher than the government's budgeted target. It also recently sounded a note of caution that the policy measures announced by the government recently could increase the risk of fiscal slippage beyond the current budget.
Hence, speculation suggests that the ceiling may not be raised by more than Rs 50,000, taking the tax exemption limit to Rs 3 lakh. Let's not forget that in the Modi government's first budget, the personal income tax exemption limit had been raised by an identical amount to Rs 2.5 lakh. Add the Rs 2,500 rebate under Section 87A, and the basic tax exemption currently goes up to Rs 3 lakh. Can the Modi government do one better after all?
(Edited by Sushmita)