Parallel tax regime

IT will take some time for the people to assess the pros and cons of the parallel system of income tax proposed by Finance Minister Nirmala Sitharaman. The expectations were that the exemption limit would be increased and the tax slabs would be rationalised to put more money in the pockets of the people and push new investments. What has emerged is a different set of choices, with people having the option to go for what they think is better for them. One can pay taxes at a lower rate if the exemptions are not availed or continue with the existing system. Sitharaman indicated that the country is veering off the socialistic pattern of economy but how is it prepared for this new model will unfold only gradually.

Indians are dubbed low-risk investors, natural in a country with mostly low-income groups. The tax exemptions were a way to create cash reserves, even more important in a scenario with bleak social security prospects like no pension. The tools were viable, with guaranteed returns. But things had been changing with interest rates on small savings schemes getting reduced. The slowdown does not offer much scope, so the government has chosen the middle path. The new system will offer more disposable income — to spend or invest — as per choice. The spending is expected to revive the sluggish market, but what is of import is the kind of market and goods that this money will get diverted to. And what happens to the financial institutions, beneficiaries of savings made under the exemption limit?

No wonder that the government plans to sell stakes in the state-run LIC. Post offices, known for small savings, are already witnessing a role diversification. And what about the health insurance companies that proliferated in the private sector? Money, it seems, will not remain with the people — with exemptions, you get less due to higher tax; with the new slab, you end up spending in the market, or investing in tools with less assured returns and more risks. After demonetisation and GST, the tax maze will be another Herculean task for the government.

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