Middle of Nowhere Class: When just 2.56% pay 100% of India’s income tax & govt wants more

graphic with Arun Jaitley and Bombay Stock ex building
Illustration by Peali Dezine

Governments treat the middle classes rudely and squeeze taxes out of them as they are the usual suspects – without lobbies or electoral power.

Since Casablanca’s cult transcends generations, you could easily use one of its immortal lines to describe what the NDA government’s last budget has done to India’s middle class: round up the usual suspects, as good-for-nothing cop Captain Renault had said after an incident at ‘Rick’s Café Americain’.

So any time our government is short of money, because of profligacy or the political need to throw money for votes, it catches the hapless middle class, predominantly those in salaried employment. You can strangle them as much as you wish. They don’t have a voice, no constituency, and no common identity. Just grab their necks, a kick in the butt, and they will cough up. There will be no political fallout.

If anything, the louder they complain, the better it will be, as it will give the poor vicarious satisfaction. In current times, we can call it the “demonetisation” model of politics. Do something dramatic that enables you to go tell the poor while they might be hurting, please bear with me, you have no idea how badly the wretched rich are hit. It is a different matter that the rich never really hurt. The poor do, but they are in a perpetual mess anyway. The middle class, you can hurt anytime. For revenues, politics, pleasure, anything.

This budget would have disappeared from our minds latest by the morning after. Or, let us qualify. It wasn’t particularly newsworthy, immediately. Large parts of it will come back into our lives in the BJP manifestos until the summer of 2019. But it was kept alive Friday by the carnage on the stock and bond markets.

As immediately market-destructive budgets go, this was in the category of “Dada” Pranab Mukherjee’s retrospective Vodafone amendment. So toxic, two finance ministers after him, through six budget years, haven’t dared touch it even with surgical gloves and forceps. Three of P. Chidambaram’s budgets too had elements that shook the markets, including Banking Cash Transaction Tax, Securities Transaction Tax and a complete rewrite of employee stock options taxation. This budget’s assault on the one refuge middle-class savings had found over the past decade, an avenue promoted through sarkari advertising, equity-linked mutual funds, compares well with any in the past in its ability to damage the markets in the short run, and confidence going ahead. It has also left the middle class nowhere to go.

I write this sobered by the fact that T.N. Ninan, chairman of Business Standard Ltd., and India’s most respected commentator on the economy, had made a strong call for bringing back the Long Term Capital Gains Tax on equities. In his ‘Weekend Ruminations’ (6 January 2018) he had argued that if the finance minister wanted to minimise the deficit, he had no choice but to tax equity profits. The finance minister obviously found his advice sound and valuable, and its economic logic for minimising the deficit is formidable. I am addressing this from a different vantage point.

First, is a question. Can a government do whatever it wants to fund its electoral politics unmindful of fiscal consequences and tax its way out of this? I am not complaining about the subsidies and what are called pro-poor schemes (expenditure is up on these). But a bizarre idea like demonetisation which shaved off wealth worth 1-2 per cent of growth from an entire year’s GDP, besides destroying many jobs and small businesses?

The economic proposition behind it was that it will yank millions out of the informal, cash economy into formal banking channels, greatly increase India’s tax-payer base and collections. Nearly one-and-a-half years later, that dividend is missing.

Economist Kaushik Basu picked out a nugget from the Economic Survey as an admission of the failure of demonetisation – “It is good to see India’s Economic Survey 2017-18 admit to the big mistake that was demonetization, by explaining the economy’s current slowdown in terms of the ‘dissipating effects of earlier policy actions’,” he tweeted. You are, on the other hand, padding your bottom line by taxing dividends on equity-linked mutual funds. The claim that you were going to get tens of millions more taxpayers has proven to be fiction. You are, therefore, left with no choice but to go and play Captain Renault again, and round up the usual suspects.

The second argument is political. The reason governments (all of them, not just BJP’s) are able to treat the middle class so rudely is that it has no lobby, no electoral power. A budget like this may be positive for your politics. You need to convince the poor they have lakhs of crores coming their way, in this life or the next, tell the farmers you will throw money to address their distress, because they have the votes. For the middle class, which voted for you overwhelmingly, you have other compensations. Yoga, cow-protection, and the sorting out the Muslim “problem”, in its entirety, from triple talaq to Haj subsidies to love jihad.

Some data points are embedded in our popular discourse. One of these is that only 2.56 per cent of Indians pay income tax. It sounds awful in a country of 1.3 billion with a large middle class, much larger than this 2.56 per cent irrespective of whether you believe the estimates of the NITI Aayog or The Economist magazine. But you can frame that question differently. Isn’t it doubly awful that only 2.56 per cent Indians pay 100 per cent of its income tax?

It follows that a great government would do something to greatly expand that 2.56. Demonetisation was supposed to be the first, “jhatka” solution, followed by GST, the “halal”. Where is that increase? The fact is, all governments have failed in this one single objective. As a result, failing to catch the wholesale tax evaders, or the untaxed crores, they keep attacking the ones that have nowhere to hide.

Where do the salaried take their savings now? Because they do not have cash and property has tough entry barriers. It has also lost value steeply in the NDA’s four years. Banks, even government savings with administered rates, have been paying diminishing interest—while the same banks haven’t accordingly cut lending rates so EMIs haven’t fallen accordingly. Like the governments, the leaky, greedy banks also know the only people they can cream to shore up the balance sheets destroyed by large defaulters are the middle-class depositors and borrowers, for housing, vehicles or education. Where will these savers take their money now? To gold?

When Chidambaram’s 2004 budget led to an immediate fall in the markets, he had said the same thing finance ministers often say in such situations. Do I make a budget for the farmer or the broker? I had then written a comment saying in modern economies it could no longer be the farmer versus the broker. It should be the farmer and the broker. Because even agriculture and financial markets were no longer quarantined from each other. That budget went through many corrections and much damage control. As should this one.

India’s middle class is mostly urban, and still strongly committed to Narendra Modi, as evidenced in the Gujarat elections. It is so loyal to him, it even absorbed the fact that over nearly four years his government has refused to pass the benefits of lower oil prices to it and folded the increased excise collections into the fisc. This blow to the one refuge for its savings will leave a deeper scar.

27 COMMENTS

  1. Very aptly said. Till today I have never voted any other party other than bjp. As a salaried middle class person I was banking on mutual funds to secure my retirement, kids education etc but there also govt has put taxes. What benefits this middle class gets after paying this huge tax. We need to worry about kids schooling, medical expenses, retirement. There is no social security whatsoever. I am dons with modi and his bhashans. I hope that the salaried middle class will come out and vote so that its voice also will be heard. Most of my office supported bjp blindly and they are a aghast after this LTCG. This is the worst govt. I am never seen such fools who we strops their assured voters for the swing votes. I am sure they will repent severely in 2019. If you did not have fiscal space don’t give any benefit but atleast don’t tax the poor salaried middle class. This is betrayal.

  2. Sir, Thank you for this… you are the only one who wrote on behalf of the segment of the population that carries the weight of the world. Worried about being branded, most are quiet on this issue. Even those who commented are lamenting for the foreign portfolio investors and not the salaries Indians who have put their life earnings in SIP and market linked products. Last year, they added 10% surcharge on IT, this year LTCG. Cumulatively we are poorer in net wealth compared to 2016, even after modest pay hikes… I reminded of ‘Atlas Shrugged’. It will happen. In many ways the brain drain we see is also a manifestation of that. It was a big crime that we burned midnight oil, studied hard, got our degrees and stayed back to contribute to the country’s development… yet end up being abused this way. The real imapct will be that with lower net savings yearly, we will have to work longer and delay our retirements, denying opportunities for the next generations.

    • Don’t fret for staying back and contributing to the motherland !

      There is always a silver lining. Bharat will give us a new hero, because there are too many good citizens in our country.Even God has to listen someday !

  3. One reason only 2.56% of Indians pay tax is that we are still predominantly a poor country. Some self employed people – the paneer pakodawallahs – may be cheating on tax, as public functionaries who collect rents do, but, over the years, most eligibile families have started filing their returns. If one sees the cost of living, income tax liability should now start at 50,000 per month, something people would expect a right of centre party like the BJP to appreciate. 2. All Indians pay indirect taxes. Almost the entire windfall from lower oil prices has been quietly usurped by the central and state governments. What happens to all this tax revenue remains an abiding mystery, for life has not improved for the poor or the lower middle class in the last four years. Babus have got their seventh pay commission, the faujis their OROP. 3. LGCT is an act of bad faith, for STT is already there. 4. The urban middle class helped Dr Singh win a second term. It also saved the BJP’s bacon in Gujarat. As the government will discover, there isn’t enough juice left in the fisc to buy its way through in rural India. 2,000 crores for healthcare will not yield the votes of 100 million poor households. Ultimately, the state of the economy, more than a forgettable budget will decide the all important question of a second term.

  4. People don’t pay taxes because they have lost trust in political class. They know that their money will be squandered by the unscrupulous politicians in giving subsidies to undeserving, for waiver of loans to big farmers, for giving free electricity to farmers and they will run air conditioners on that. MLAs and MPs become mega rich in just five years with unethical practices.

  5. What does the middle class care for, poor people, minorities, what? What proportion of the total revenue is the 100 percent income tax, which is its liability anyway, that it pays? Can’t be much. There have been suggestions that personal income tax should be abolished. It had also supported Indira’s Emergency! Why? Now it supports Modi, who considers it fit only for, apart from Yoga, the criminal activities involved in “cow-protection, and the sorting out the Muslim “problem”, in its entirety, from triple talaq to Haj subsidies to love jihad”! Why should Modi care for them, knowing the idiots would support him, no matter what? They deserve what is coming to them. Let the whipping continue until the morals improve!

  6. It is highly unfortunate, that in country of over a billion people, we still couldn’t get a decent honest counter to Modi.

    Why can’t we produce just one citizen to match Modi in honesty, and speech making ability minus his bad judgements n bad policies like one lakh crore bullet trains, 4000 crore statutes, unbridled govt expenditures on babudom etc,not taxing the wealthy through inheritance tax, or wealth tax,but going only after the salaried class with a pittance of 2.5 lacs as exemption ? This amt is the money many MLAs make every day ! They are never touched.

    The day Modi goes after ANY politician of his own party who has unaccounted wealth, we can consider him a path breaking leader.

  7. I do agree with this. 100% betrayal. Announcing Standard deduction at 40K on one hand & removing Medical & Conveyance on other hand. Increasing Cess to 4%. Cheaters to the core. When STT was introduced in lieu CG Tax, how can LTCG be introduced again ? Do BJP thinks they can take salaried middle class for a ride ? They are going to get the taste of their life time in 2019. We are not going to keep quiet now. Time has come to show the strength of middle class.

  8. I read this elsewhere. Sounds about right:
    *The big myth on Income Tax Payers in India;*

    Data from a Chartered Accountants’Company Secretaries and other professional bodies and groups…….;
    ✍ FM said during his budget speech that we are largely a tax *’non- compliant’* society and presented that only *3.7 crores* are filing ITRs in this poor country of 125 crore population .

    *The reply by CAs ,CSs,CMA,s

    Sir,
    We have 82 crore voters out of which,

    – *75% are agriculturists* ie. 61.5 crores ( You exempted them straightaway, but they can also buy cars , bungalows etc. as you quoted.. Your political colleagues are also enjoying this exemption)

    *Balance remains… 20.5 crores*

    *Less:24% BPL class* ( Below poverty line)

    Means 15 crore population ( which is non agriculturist and non BPL) ..

    *Less : Senior Citizens, Non working wives, unemployed youths, below-taxable income earners… political class.. (say 75%)* … in a typical indian family only 1 earning member and 5/6 are dependent on him….

    *Balance: (15-11.25)=3.75 crores is the earning class … which can file ITRs and … they are already filing it…*

    …. So almost no gap as FM is stressing unnecessarily without knowing his country🤓😝😱

    if FM wants more people to come into tax net … then… instead foolishly resorting to rampant raids, surveys, notices, scrutiny, demonetisations etc etc viewed as *tax terrorism* … he should defy his negative bureaucrats and …….

    1. Introduce simple Income Tax on Agricultural Income on large landlords ( Say 10 Acres plus ) – you can add 26% of Agriculturists as tax payers *( Politicians are also enjoying this exemption )*

    2. Instead of introducing 5000 /10000 penalties on late filers of IT return …
    *come out with positive approach and introduce incentives to IT return filers* ( learn from Pakistan, IT assessee gets discount in purchase of Car )

    3. *Introduce Privilege card to those paying taxes above certain limit.. privilege card to entitle assessee with benefits like Priority quota in railway tickets , Use of airport lounges, subsidised medical facilities, etc etc… let Tax payers feel proud*

    4. *Introduce medical insurance / life insurance on basis of average ITR filled… like coverage upto twice of Gross Income in ITR filed for mediclaim and ten times risk cover in case of life insurance*

    5. *Introduce Pension after 65 yrs of age on the basis of tax paid by tax payer during his working life..*

    Let honest taxpayers get certain direct benefits….

    As on today, 3.3% of Indian population is filing ITRs as compared to 8% of China…adding large agriculturists to Income Tax may shoot the figure to more than 10% …. it may help you to cool your tax terrorism mindset and a tax compliant nation.

  9. I thank sir modiji’s govt for favouring senior citizens in relieving their tax burden.unfortunate are those in service who are denied any benefit.I can remember only one govt headed by sri devegowdaji when sri chidambaram was FM offered bumper relief to salaried and never again by any govt.

  10. on Companies taxes reduced from 30% to 25% where as Individuals continue to pay taxes @ 30% in Maximum Slabs and And successive govt’s continue to strangle, levy new taxes cess Surchage and extort from only these few honest Indians. and no efforts are made to tax those who have more income than Income Tax payers but are not in Tax net.. This New Healthcare Scheme will also exclude Income Tax Payers.. Gas Subsidy has already been taken away.. Fuel prices are not reduced for reduction in International prices but increased when international prices increase.. Most of The Tax payers Dont use Govt Schools for children education .. Govt Hospitals for Healthcare.. Pay road tax for Their vehicles.. and what not.. they are most easy targets.. cess has been increased from 3% to 4% … LTCG 10% over and above STT on sale purchase of shares..

  11. Extremely disappointed by this budget.
    I was saving some through SIP and that option also is gone now. Will never dream again. I dreamed and working hard to get my family from poor to middle class and now, what I realise is, I will be going in a reverse way around.

  12. The govt is always after the middle class which is quite vulnerable. But how much fish can you catch from urine water?.BJP promised basic exemption of five lakhs in its manifesto but failed in its promise.

  13. It’s good to see that even media recognizes that “Governments treat the middle classes rudely and squeeze taxes out of them as they are the usual suspects – without lobbies or electoral power.”

    There is an attempt being made to unite all salaried class via Facebook Group “Honest Tax Paying Indians”.

    They pay excess taxation then take loans to meet their basic needs like medical, home etc…. but the problem is salaried class just doesn’t want to do anything about their problems else everyone would have made enough efforts to unite everyone.

  14. Sir
    Thank you for raising issues for middle class. Middle class is Urban population and always vote for BJP. I have also always voted for BJP. But BJP FM has never given anything to middle class in his budget.
    TAXING LTCG is a big blow to salaried and retired person, who are also senior citizen. Market will also hit badly. If market hit badly, hot they will get money in disinvestment. What they will loose in not getting good pricing in disinvestment may be more than what they get in LTCG tax.
    If I bought a share in July 2017 for Rs 150 and if it becomes Rs 110 on 31st Jan 2018 and if I sell share in August 2018 at Rs 130, will it be a capital gain??. FM in his speech said value of share as on 31st Jan, 2018 will be considered as base rate.
    If my ULIP is matured in July 2018, which has a percentage share of equity and balance is bebt , how do I know how much is appreciation in equity portion after 31st Jan, 2018. How do I deposit LTCG tax.
    Foreign investors as well as domestic investors will go away from capital market. Mutual funds have built enormous fund, which is supporting market continuously. Investment in Mutual Funds will also come down as investments in MF will no more lucrative.
    We therefore humbly request honourable Prime Minister as well Finance Minister to please re consider the Levy of LTCG tax and remove it the way they re consider taxing Provident Fund money.
    Regards

  15. Sir
    My sincere request is to remove LTCG tax and instead lavy Tax on Agriculture income. You can exempt small farmers who have income may be up to Rs Ten or Twenty lacs per year. But what is the rational not leaving Tax on agriculture income where people are making white of their black money by showing lacs and crores of Rs as their agriculture income and not have a farm produce of even single paisa.
    Request honourable Prime Minister to consider it who is know to take any bold step.
    Regards

  16. What was the need of raising the salaries of the President,vice president, governors & MP? There salaries are non taxable. they get everything from the taxes we pay. Means you are snatching the money from us middle class to get the raise for your salaries. You kids study in foreign without any difficulties, and here we middle and lower middle class are dying to make our daily ends meet. Since my grandfather days we were Pro BJP and never voted for another Party but now i believe its time to rethink.

  17. *The big myth on Income Tax Payers in India;*

    Data from a Chartered Accountants’Company Secretaries and other professional bodies and groups…….;
    ✍ FM said during his budget speech that we are largely a tax *’non- compliant’* society and presented that only *3.7 crores* are filing ITRs in this poor country of 125 crore population .

    *The reply by CAs ,CSs,CMA,s

    Sir,
    We have 82 crore voters out of which,

    – *75% are agriculturists* ie. 61.5 crores ( You exempted them straightaway, but they can also buy cars , bungalows etc. as you quoted.. Your political colleagues are also enjoying this exemption)

    *Balance remains… 20.5 crores*

    *Less:24% BPL class* ( Below poverty line)

    Means 15 crore population ( which is non agriculturist and non BPL) ..

    *Less : Senior Citizens, Non working wives, unemployed youths, below-taxable income earners… political class.. (say 75%)* … in a typical indian family only 1 earning member and 5/6 are dependent on him….

    *Balance: (15-11.25)=3.75 crores is the earning class … which can file ITRs and … they are already filing it…*

    …. So almost no gap as FM is stressing unnecessarily without knowing his country🤓😝😱

    if FM wants more people to come into tax net … then… instead foolishly resorting to rampant raids, surveys, notices, scrutiny, demonetisations etc etc viewed as *tax terrorism* … he should defy his negative bureaucrats and …….

    1. Introduce simple Income Tax on Agricultural Income on large landlords ( Say 10 Acres plus ) – you can add 26% of Agriculturists as tax payers *( Politicians are also enjoying this exemption )*

    2. Instead of introducing 5000 /10000 penalties on late filers of IT return …
    *come out with positive approach and introduce incentives to IT return filers* ( learn from Pakistan, IT assessee gets discount in purchase of Car )

    3. *Introduce Privilege card to those paying taxes above certain limit.. privilege card to entitle assessee with benefits like Priority quota in railway tickets , Use of airport lounges, subsidised medical facilities, etc etc… let Tax payers feel proud*

    4. *Introduce medical insurance / life insurance on basis of average ITR filled… like coverage upto twice of Gross Income in ITR filed for mediclaim and ten times risk cover in case of life insurance*

    5. *Introduce Pension after 65 yrs of age on the basis of tax paid by tax payer during his working life..*

    Let honest taxpayers get certain direct benefits….

    As on today, 3.3% of Indian population is filing ITRs as compared to 8% of China…adding large agriculturists to Income Tax may shoot the figure to more than 10% …. it may help you to cool your tax terrorism mindset and a tax compliant nation …😊
    *LET’S SPREAD THIS TO EDUCATE HONEST TAX PAYERS*

  18. Modi government feel that middle class is churan. I always supported BJP but this government thinking people are fool. Modi government downfall started now. Next election I will vote NOTA.

  19. I (a journalist) have a lot of respect for Shekar Gupta, even despite his pronounced anti-Modi tilt–tilts of any kind don’t go well with journalism. But in this article, he does himself little credit. I am of the middle class and am not particularly sorry that the Budget has not given me much. But that is beside the point. The point is, Shekar Gupta has no where spelt out what he is referring to when he says the Budget catches the hapless middle class man by his neck and whacks him. The Budget does nothing of that sort. To say that the Budget gives the middle class nothing is one thing, but to say that it pinches the middle class pocket is not true. Still, there are a few points worthy of note in this context. First, the taxes that the middle class pays is not alarmingly high. A person who earns Rs 20 lakh a year, and pays a home loan interest, pays around 16-17 per cent effective tax. Personally, I would obviously be happy if this is brought down to, say, 10-12 per cent, but I won’t boo the finance minister for not doing so. The trick to bring down tax rates is to widen the tax base further, which, as someone has pointed out here, calls for bringing in rich agriculturists into the tax net. But this is a political question, and you can’t fault a FM for not doing so in a pre-election budget. (I will continue in my next comment).

  20. (…to continue), it is sad that people judge a Budget by how much more money it leaves in their pockets. That is a short-sighted way of seeing things. If the economy improves because of the Budget, there is more to be gained than by a little tax sop. The FM may give me a tax break of Rs 4,000 a month, a booming economy could well improve my earnings multiple times that. Secondly, if the tax money is used to improve my standard of living–better roads, better healthcare and security etc–I have no complaints. Everybody knows this–I’m not revealing any secret–but it bears reiteration here. That’s why I — a part of the middle class — am not too sorry that the Budget has not given me a tax break. If the hike in MSP (assuming it is properly implemented) generates more farm income, it will be far more beneficial for me, than a tax rate cut.
    Shekar Gupta is sorry that the benefit of low crude prices were not passed on to the consumers. Well, you can either pass it on to consumers, or use the opportunity to shrink the fiscal deficit. The govt has used it for the latter, which is prudent. A high fiscal deficit means a) more of govt market borrowing, which will buoy interest rates and make companies less competitive which in turn will hurt investments, and b) more of printing money, which will be inflationary and hit the poorest of poor the most. I think a structural change such as bringing the FD down is a more mature, less populist approach.
    Shekar Gupta is completely wrong, therefore, when he says for the middle class all the govt has to offer is yoga, cow-protection and the ‘joy’ of knocking muslims on the head. Saying so not only insults the middle class man like me, for he insinuates that I am a fool enough to be happy with yoga, cow-protection and anti-muslim measures. It is downright offensive.

  21. See? This is the difference between ThePrint and The Wire, run by Siddharth Varadarajan. You give a comment criticising ThePrint, they take it. The Wire, on the other hand, will ignore all critical comments. I have posted innumerable comments against the contents of the articles of The Wire, but none of them is ever published. They lack the guts, clearly. Which is why I admire ThePrint, particularly, Shekar Gupta’s articles, even if I disagree with some of them. Thank you, Mr Gupta.

  22. How do you know middle class us committed to Modi when you have EVMs? Democracy is dead. We are living in a make-believe democracy. Aadhaar is the biggest wake up call that it is putrefying.

  23. All years I have voted for BJP but this time my vote is not going to BJP. Thanks to Jaitly’s arrogant comments on middle class taxation.

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