Budget 2015: Middle-class consumers feel the pinch as FM Arun Jaitley raises duties and service tax

NEW DELHI: Middle-class consumers need to brace themselves for a steady drain of daily pennies as the proposals in FM Arun Jaitley’s Budget on excise duties and service tax will make a multitude of products ranging from mineral water, aerated drinks and mobile phones and several services including phone, food and bank bills, holidays and beauty treatments a trifle more expensive.

At the same time, Finance Minister Arun Jaitley has incentivised greater investments in health insurance and pension plans encouraging taxpayers to invest more in these instruments.

The net impact of both — higher daily expenses and greater savings — is likely to squeeze consumers, leaving them with lesser discretionary spend. The ‘save more spend less’ message the Budget is sending out to middle-class India may be a dampener on consumption, in the short run at least.

"The Budget is doing nothing to help consumption," said Kishore Biyani, CEO of Future Group. "We have been working harder in the past few months to attract consumers and things like (increase in) service tax will derail it further."

In another unrelated development, oil firms raised petrol prices by Rs 3.18 per litre in Delhi and diesel by Rs 3.09 from Sunday, to align fuel rates with global trends and the rupee-dollar exchange rate. This is one of the steepest hikes in recent times. Prices are being raised for the second time in two weeks as international oil prices that had more than halved since June last year began climbing back this month. Middle-class consumers will feel a daily pinch as price hikes resulting from tax rate changes kick in.

Colas and other aerated drinks will be dearer by Rs 1 as a result of an increase in excise duty rates. Eating out will now pinch just a little bit more.

Services that fall under the service tax net will also cost more as the effective tax rate has been increased from 12.36% to 14%. For example, entry into amusement parks, bowling alleys, concerts, etc, with admission prices above Rs 500 will cost more.

Moreover, there is also the threat of a further increase in service tax. Jaitley has taken an enabling provision to impose a ‘Swachh Bharat cess’ of up to 2% of the taxable services should more funds be required for the clean India campaign.

A Rs 10,000 smart phone will now cost about Rs 360 more and phone bills will also be higher. "Prices of mobile handsets will increase by about 5%," said Vishal Malhotra, telecom tax partner with Ernst & Young.

Individually, each of these measures may only be daily pennies lost for consumers. But the combined impact on a middle-class household budget can’t be ignored.

The impact on sentiment for India’s economic elite will be worse. An additional 2% surcharge has been imposed on income tax paid by individuals with a taxable income of over Rs 1 crore. Moreover, unlike companies which can now look forward to a lower tax rate of 25% (down from 30%) over the next four years, individual income taxpayers got no breaks on income slabs or tax rates.

All that middle-class India got from FM Jaitley was hope. "As and when my fiscal capacity improves, individual taxpayers will have a lot to look forward to," he said in his Budget speech.

An individual tax payer falling under the 30% income tax bracket could potentially save a total of Rs 21, 506 in taxes in the next financial year. But he will need to invest about Rs 60,000 more in pension plans and health insurance to avail of this tax saving.