The Union Budget has created two sets of taxpayers and in doing so has totally disincentivised savings. The mishmash of having two different sets of taxpayers — those who avail deductions and the other group who do not and can still avail lower tax rates — doesn’t cure the basic malaise of the sharp fall in savings in recent years.

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From a peak of about 30 percent of personal disposable income (PDI) in 2004-05, household savings stood at around 21.4 percent in 2018-19, marking the lowest level in the past two decades.

Under the new regime, taxpayers simply need not invest or save any money to avail of taxation benefits. The budget discourages a ‘savings’ culture. If you invest, you would end up paying more taxes and if you don’t, you may actually shell out less.

In the FM’s own words, a taxpayer “would still be the gainer in the new regime even if he was taking a deduction of Rs 1.5 lakh under various sections of Chapter- VI-A of the Income Tax Act under the old regime”.

If key deductions such as Section 80C of the ‘Income Tax Act’ are not available or are simply not needed to save taxes, buying a house, purchasing tax-exempt mutual funds (MFs), insurance or any other key tax-saver products would no longer be attractive.

This would have a significant impact on inflows into financial savings products such as life insurance schemes, equity-linked savings schemes and even traditional products such as PPF (public provident fund). An individual earning Rs 15 lakh a year would be able to save Rs 78,000 per year under the new regime and he/she can get the benefit by simply not investing any money to avail deductions.

The budget is likely to boost consumption. But the lack of consumption is not the problem. Indians are already spending money at a faster rate than they are earning. Personal consumption growth outpaced the increase in personal income in the decade that just ended (2010s).

The slow growth in PDI and the consequent fall in savings is the real issue that the budget has failed to address. “Although a new tax regime with lower tax rates has been introduced, the removal of all exemptions including even 80C exemptions, will water down its benefits,” said Ankur Choudhary, co-founder and chief investment officer (CIO), Goalwise.com, a direct MF investment platform.

Sunil Rohokale, managing director and CEO, ASK Group, said the option to choose the old or the new income tax regime will just complicate filing income tax returns which were already a complicated process for individual taxpayers.

“This budget is most complex but surely it appears liquidity in the hands of individual and corporate will help consumption and investment,” he said.

“But it massively missed addressing the real issue of joblessness, hopefulness, and confidence in the economy by lack of short-term boosters to get back to 6 percent-plus growth,” he said.

Although the dividend distribution tax has been abolished at the company level it will be taxable at the hands of the investor, according to Choudhary.

Not only has household savings declined, but consumer debt has also increased to record highs in the past few years. Household debt as a proportion of Personal Disposable Income (PDI) PDI has jumped to 46 percent in 2018-19 from 26 percent in 2004-05.

Allirajan M is a journalist based in Coimbatore.

First Published:Feb 1, 2020 4:14 PM IST