The Budget for the financial year 2024-2025 can probably be called a budget for imposing a tax on

individual assets, especially on Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG).

For LTCG the tax rate has been increased from 10% to 12.5% and for STCG it has gone up from 15%

to 20%. Looking at the financial health and economic situation of the nation it has become

imperative on the part of the government to keep the fiscal deficit under control. Although the fiscal

deficit has been pegged at 4.9% of GDP, but it is still quite high as per FRBM Act. But merely aiming

at controlling of fiscal deficit won’t ameliorate the economic situation. If we look at the expenditure

statement, we can see that there is a significant reduction in the allocation of education, health, and

defense sectors. Similarly, the budget of MANREGA which is an important source of employment

generation in rural sector has also been reduced drastically. Therefore Instead of concentrating on

the individual taxpayers and increasing the tax rate the government should take adequate steps to

widen the direct tax net and controlling of inflation. If we look at the projected revenue forgone for

2022-2023

The budget of 2024-2025 is a harbinger of despair and pain among the middle-income

groups. This is because the budget has given no tax relief for the individual taxpayers, especially for

those who pay the tax as per the old tax regime, instead, it has raised the tax rate in LTCG and STCG.

This policy will discourage small and retail investors to invest part of their disposable income in the

stocks and units of equity oriented mutual funds. Already day by day it is becoming very difficult for

the middle income and lower income groups to go for significant investments because of rising

inflation. This will have an adverse impact on Gross Domestic Savings (GDS) which will become a

hindrance in the capital formation. The obstacles in the capital formation, will be an impediment to

the expansion of economy and the overall economic growth of the nation.

Another significant trend that can be noticed since the inception of the new tax regime is that

the government is continuously trying to compel indirectly to the individual taxpayers, to go for the

new tax regime instead of the old one. The increase in the limit of the standard deduction from Rs.

50,000 to Rs. 75,000 and the deduction on the employer’s contribution to the employee’s NPS

account has been raised from 10% to 14% is a testament, that the government is desirous of

abolishing the old tax regime. By doing this the central government is showing its intention to adopt

Direct Tax Code (DTC). This is because, in the new tax regime, no benefits of deduction u/s 80(C) are

available for individual taxpayers. This is an ominous sign for the insurance industry as well as for the

equity-oriented mutual fund sectors. As per the report, nearly 60% of the income taxpayers go for

life insurance and investment in units of equity-oriented mutual funds because of the tax benefits. If

no tax benefit is avail by way of deductions, definitely individual taxpayers especially the salaried

class will move away from investments. This will affect the business of life insurance and mutual

fund sectors adversely. Moreover the increase the tax rate of LTCG and STCG will add fuel to the fire.

The Union government has its own explanation. It is aiming at controlling the fiscal deficit

by keeping it under 3.5% of GDP in order to adhere to FRBM Act. A common question is being raised

that if the government does not impose these taxes where can it generate the revenue to bring

down the fiscal deficit and keep it under control? The answer to this lies in the formulation of fiscal

policy itself. The answer is quite simple, if we look at the projected revenue forgone of 2022-2023,

we can see that the amount of revenue forgone by way of corporate taxes estimated is almost Rs.

1.10 lakh crores. If we look at the last few year's budgets the figure is more than 10 to 12 lakhs

crores. This revenue forgone exists because of the taxation policies adopted by the government.

Hadn’t that relaxation to the corporate sectors being given the amount of revenue forgone by way

of corporate taxes have been avoided and that could have been utilized by way of investments, and

finally that would have led to the overall expansion of the economy and would have created a

tremendous impact on the employment generation. Also, the tax rate for the corporate sector has

been reduced substantially for the last few years.

Another implicit aspect of DTC is that slowly but surely it will affect the GDS and employment

generation adversely. The reason behind this is, people will tend to invest less because of non-

availability of tax benefits and secondly various organisations which are working in the investment

sectors especially the insurance sectors will get affected adversely. Therefore instead of increasing

the tax rate on investments for individual tax payers, the government should concentrate more

towards controlling inflation, revenue generation by way of corporate taxes, and creation of demand

in the economy which will ultimately lead to the overall economic growth of the nation.

Dr. Shantanu Bose

Expert in Financial Analysis