GST rates could be tweaked across most items of mass consumption
Frankly, this has already been substantially achieved. The last GST Council meeting in October reduced the rate of GST on most essential items to either the 0 % or 5 % bracket. The budget will also take up a simpler classification of GST. The idea will be that items of mass consumption and nutrition for the middle classes will attract the lowest possible rate of tax. The government will look to tax luxury segment at much higher rates so that the entire GST is in line with the concept of progressive taxation. Under the non-profiteering clause, all rate cuts in GST will have to be passed on seamlessly to the end customer. That will ensure that the household budgets for most middle class households will come down sharply and leave more of a monthly surplus. That could be the good news!
Most luxury products could see special GST levy
This is, in a way, an extension of the first point. While the government will look at moving the GST on items of mass consumption lower, the items of exclusive consumption will be moved upwards. Items like luxury cars, houses above a certain value, luxury clothing and perfumes will all attract higher GST rates. The challenge for the government is that the number of consumers for these high end products is quite limited and hence even if the rates are revised upwards the net impact on revenue may not be too high
Tax exemptions will put more money in your hands
This could be the budget of a series of tax exemptions for the middle class. For example, there is a demand to make income up to Rs.5 lakhs tax-free. While this may not happen in this budget, there could be some leniency leading to lower tax outgo for the taxpayer. Secondly, most taxpayers are not able to fully get the benefits of Section 80C as their basic investments like EPF, home loan principal and tuition fees crosses the threshold limit. This limit of Rs.150,000 is likely to be increased in this budget. Also the Section 24 for claiming tax exemption for interest on home loan is at Rs.200,000 per annum and that is quite unreal considering the home prices today. The government may look at benefits like extending the first home exemption, expanding the Section 24 limit, specific benefits for mid-range houses etc. All these measures will put more money in the hands of the people and also help them plan their home purchase better.
Lower GST on financial services will mean it is time to increase your insurance cover
One of the areas the government is likely to consider in this budget is lowering the rate of GST on financial services. Indians are not only underinsured but they are also substantially under-invested and they hardly have any social security. The budget could address this by reducing the GST on financial services so that with the same premium people can afford more insurance cover. Also the reduction in transaction costs will improve returns on investments in equities and mutual funds. For the retirees, the government also will make the NPS more attractive by making the entire 60 % portion tax-free in the hands of the taxpayer.
HNIs be prepared for higher surcharge on tax
The rich will pay a little more tax. There will be a few interesting measures on these lines. For example, Dividend Distribution Tax (DDT) could be scrapped as it impacts all shareholders uniformly. That will increase the net dividends in the hands of small investors and act as an incentive to invest in equities. The 10 % tax on dividends above Rs.1 million could stay and the government could include one more slab of possibly 20 % tax where annual dividends cross a certain threshold. Then there is the issue of surcharge on income tax and the special surcharge payable by HNIs above an income level of Rs.50 lakhs and Rs.1 crore respectively. While the surcharge will stay, we expect the special levy on incomes above Rs.50 lakhs and Rs.1 crore to be increased proportionately. Alternatively, we also foresee a situation where the cut-off income for special levy may be brought down from Rs.50 lakhs to Rs.30 lakhs. Either ways, this budget is likely to pinch HNIs a little harder.
Will this budget look at the idea of expenditure tax?
While these may be early days yet, there is a discussion about imposition of expenditure tax instead of income tax. The problem with income tax is that people get unnecessarily obsessed with saving tax. Also income tax unnecessarily constrains the spending power of people. This can be rectified by resorting to an expenditure tax and scrapping income tax totally. Alternatively, the government may look at a flat tax of 10 % in the form of TDS for mapped earnings up to a certain level. This is slightly ambitious and may require further debate but this budget could explore that possibility. Remember, shifting out of income tax to an expenditure tax will have huge positive repercussions for purchasing power of small taxpayers. One hopes that a start can be made in this budget!