Budget 2025: Tax sops for middle class too high & shrinks tax base; no mention of capex, Trump threat: Swaminathan Aiyar

Swaminathan Aiyar, Consulting Editor, ET Now, says the Budget shows strong support for the middle class and for Bihar. These are its main features. However, there was no focus on capital expenditure. The large tax break for the middle class may not be a smart choice. In many countries, the tax exemption limit aligns with the per capita income, which is around Rs 2.5 lakh, while our exemption limit is set at Rs 12 lakh. This means we are limiting tax payments to a very small part of the population, significantly reducing the tax base.

Can I say that this is one of the biggest and perhaps a hallmark Budget in the history of Indian budgets when it comes to direct taxes.
Swaminathan Aiyar: That will be a great exaggeration. There were very major changes in Manmohan Singh's time when he was the finance minister. This is just a break for the middle class. When Chidambaram brought down the maximum income tax rate from 40% to 30%, that was much more dramatic. So, do not exaggerate it. There is a big boost for the middle class and there is a big boost for Bihar. These are the two characteristics of the Budget. The total income tax rebate is going to be Rs 1 lakh crore. It is a large amount of money, but it is still only about 0.2% or 0.3% of GDP.

What about the other aspect of the Budget, in terms of assumptions? Fiscal deficit number is projected to be below 4.5%. Are the tax assumptions, looking at the way that GDP has slowed down, looking reasonable? What about the Budget arithmetic?
Swaminathan Aiyar: Last year it was 4.8% against the Budget target of 4.9% and that was commendable. To reduce it to 4.4% this year is also commendable. It means she has met her five-year target of reducing it from 9.2% to below 4.5%. She seems to think she has so much headroom that she can also make a big middle-class benefit. I hope she is right.


We will have to look in detail into the assumptions of the income tax receipts and so on in the coming year, what are the assumptions? I would simply say that I do not think this was a wise move. In most countries, you will find that the tax exemption limit is around the per capita income level. Per capita income level would be about Rs 2.5 lakh and we are having an exemption limit of Rs 12 lakh.

So, really, we are keeping the tax payments to a very small segment of the population. They have greatly shrunk the tax base by doing this. At a time when Mr Trump has played tricks and there are possibilities of the tax revenue estimates going haywire, I think this is a risky and unwarranted gamble. It may come true. It may come off. Some gambles do pay. But I would say that it surprises me as an economist that the tax exemption limit has now become too high.

So, what’s your verdict?
Swaminathan Aiyar: I do not think this Budget has gone in the right direction. It is a very good thing that you brought down the fiscal deficit to 4.4%. This was a major achievement over the last five years. But how have you achieved this particular thing? Earlier on, she used to boast about how much I have increased capex by. This time she is completely silent.

So, the money that used to go into capex, this time has gone into this tax cut for the middle class. Now, I want to emphasise that we are giving too high sops for the middle class. The tax exemption limit in a very large number of countries tends to be round the per capita income. Now per capita incomes in India is about two-and-a-half lakhs. But the tax exemption limit is 12 lakhs –, almost five times as much. So, we have shrunk the tax base.