The past two budgets have been nudging people to opt for the New Tax Regime (NTR). Budget 2023 claims to have made NTR all the more alluring for all categories of taxpayers. Standard Deduction as applicable to OTR has been extended to NTR besides raising the tax exemption limit for this category of taxpayers. It is being asserted that this year, more than half of the taxpayers would give up the Old Tax regime (OTR).
The hope is based on the belief that taxpayers would believe the budget communication and find it more advantageous to them in terms of savings. Verily, between the two categories of taxpayers, adherents to OTR and converts to NTR, the NTR would reduce the tax liability and at the same time would put higher disposable income in the pocket of people.
What is, however, being omitted from the communication is that there would also be a third category of taxpayers comprising those who would adhere to OTR and choose to save a portion of their income and take advantage of various kinds of permissible deductions. For them, the OTR shall be far more advantageous.
A comparison of the tax liabilities of the first two categories of taxpayers indicates that converts to NTR stand to gain across all income groups. The only catch is that they must not claim any exemptions or deductions for savings. However, the third category of taxpayers who claim deductions of more than Rs 3.75 lakh (Rs 1.75 lakh under section 80C to UU and Rs 2.0 lakh for house rent allowance or interest on home loans under Section 24) would pay much lower taxes than the NTR across all income groups exceeding Rs 15.53 lakh. The lower-income groups would derive the same benefits with even fewer deductions. Those with an annual income of Rs 14 lakh, 12 lakh, 8 lakh and Rs 7.5 lakh would pay lower taxes under OTR by claiming permissible deductions of Rs 3.25 lakh, Rs 3.00 lakh, Rs 2.50 lakh, Rs 1.625 lakh and Rs 1.375 lakh respectively.
But wouldn’t the taxpayers see through the abstruse and decipher the obfuscation? Introduced two years ago, the NTR failed to catch their fancy. Even though it claimed to have been considerably sweetened, even the most ordinary taxpayers would still find it rather sour. For them, the lemon stays sour and the grapes sweet.
Common may not be familiar with the twin rationalisation strategies: Sweet lemons, to make circumstances appear more pleasant than they actually are, and sour grapes, to omit unpleasant details. So are the cognitive biases. None are free from them but marketers and publicists take pride in manipulating them to their advantage. But they can’t be taken as simpletons unable to make out what is good for them.
However, they are at a huge disadvantage due to sheer information asymmetry. Barring a few with means and methods, most of them could be credulous enough to be easily nudged and sidetracked from safeguarding their self-interest. Besides, with NTR having been made a default option, many would succumb to the nudging in order to avoid procedural hassle for closing the option. It is this that increases their gullibility which the budget communication hopes to exploit. Decision-makers also seek to exploit flaws in how people perceive their environment and make decisions. They derive benefits from an assortment of behavioural biases. They might use salience bias to focus on emotionally striking aspects and thus dismiss the facts and features that might appear ordinary to them. They could capitalise on “framing bias», to lead people to derive different conclusions from the same information just by presenting them differently and thus mimicking a pleasant image, even when the facts are extremely unfavourable.
These strategies and possibilities notwithstanding, it deserves attention as to why the government should do so. OTR has been incentivising people to save a portion of their current income for future consumption and take care of life’s uncertainties and thus safeguard themselves and their families against future adversities and eventualities. In the process, it has been helping in capital formation for nation-building.
NTR discourages savings in order to help the government garner more revenue. By nudging people to desist from savings, it expects people to spend more and thus revive demand in the economy and at the same time scoop plentiful revenue through GST.
The discerning taxpayers would realise sooner than later that they are being made to sacrifice their future because the government wants to rev up its revenue to contain its budget deficit at their expense. They are likely to continue with their savings and investments and are least likely to discontinue their life insurance premiums, medical insurance and other small investment plans just in order to adopt the NTR.
But a good number of taxpayers would get herded to the NTR. Most of these would belong to the middle class. The middle class has been at the receiving end and has been bearing the brunt for a long time. Their numbers in India have lately been shrinking, rather than expanding.
They have indeed been finding it difficult got make ends meet. Savings for future contingencies was certainly a burden for them. They were indeed sacrificing their present desires and longing to save for education, health and housing for themselves and their children.
They are now being nudged to consume what they earn and thus sacrifice their future and bear the burden of igniting the engine of the economy at the expense of their future.
Furqan Qamar, Professor in the Faculty of Management Studies at Jamia Millia Islamia, is a former Advisor to the Planning Commission of India. Taufeeque Ahmad Siddiqui is a faculty in the finance area in the Faculty of Management Studies, Jamia Millia Islamia. Views are personal.