Take a look at how the new Income tax slabs will look under Congress Government

Congress Party, in its 2019 poll promise, proposed to give INR 72,000 annually to the bottom 20% of the families, which is approximately 5 crores. The total cost of the scheme would be INR 3.6 lakhs crore. This looks quite promising politically. But the larger question is, where is the money to fund this ambitious scheme? Piyush Goyal in his interim budget 2019-20 speech stated that the fiscal deficit is 3.4% for 2018-19 and was at 6% seven years before. Higher fiscal deficit is not affordable. And, if they don’t want to worsen the deficit condition further, there are two other ways to support the scheme. First, stop some of the currently ongoing schemes and subsidies. Second, increase taxes.

Abhijit Banerjee, Professor, MIT and one of the proponents of the NYAY scheme as claimed by the Congress party, spoke to Times Now channel on this issue. He categorically told Rahul Shivshankar, Editor-in-chief of Timesnow that there are no other ways than to increase taxes on the middle class. He also advocated for scrapping distortionary subsidies like fertilizer and power subsidies, given to the farmers. If these are the ways to finance the scheme. I attempt to come up with a new tax structure to sponsor the NYAY scheme.

Income tax collection for Financial Year (FY) 2016-17 (Assessment Year (AY) 2017-18) is 3.49 lakhs crore rupees. I have calculated the tax collection for the same year using income range wise, number of returns and gross total income data. And It came out to be 3.54 lakhs crore rupees. I did not consider savings under different tax deduction schemes such as section 80C. As I don’t have unit level data on these deductions. Also, I am accounting all the individuals as below 60 years of age. They constitute the major proportion of the taxpaying group. Again, I don’t have age wise unit level data on returns and income. The difference of INR 5 thousand crores arises due to these assumptions.

I have data on a number of returns and individual total gross income for the income range i.e. 0 to 2.5 lakhs rupees, 2.5 to 5 lakhs rupees and likewise for AY 2015-16, AY 2016-17 and AY 2017-18. I computed the growth rate of the number of returns and the corresponding income in every range (AY 2015-16 to 2016-17 and AY 2016-17 to 2017-18). I took the average of these two range wise growth rates to calculate corresponding income range wise, number of returns and gross income for AY 2020-21 (FY 2019-20). I assumed that these figures will grow with this average growth rate for the three next years (AY 2018-19, AY 2019-20 and AY 2020-21). The projected individual total gross income for the FY 2019-20 is INR 44.9 lakhs crore, whereas the estimated total number of returns for the period is 6 crores. With the proposed tax structure, which is undoubtedly quite high, Congress could garner additional revenue, which is INR 2.53 lakhs crore, 60% of the fund required to finance the NYAY scheme for FY 2019-20. The detailed analysis is presented in the table below. Sources are mentioned below the table.   

However, in spite of taxing the income class heavily, I could suggest generating only 60% of the required resources for NYAY. The rest 40% should be created by terminating some of the agricultural subsidies, as suggested by Professor Banerjee. As per a Business Today report, INR 1 lakh crore is needed to support fertilizer subsidy program for 2018-19. I assume the same amount of subsidy for the target year 2019-20. And, If Congress could stop this subsidy, it would save a significant amount, which is 1 lakh crore rupees. The total additional money, considering these two proposed exercises is INR 3.53 lakhs crore, which is equivalent to the amount needed to finance this scheme. If the party does not want to antagonize the farmers, it could levy 75% tax rate on income above INR 1 crore, instead of 45% (as in the table). And in this way, it could generate additional INR 3.4 lakhs crore from taxes only and they don’t have to stop the fertilizer subsidy program.

Now the ultimate question arises, is this viable? Farmers are already distressed and looking for more government assistance. Stopping fertilizer subsidy does not seem to be feasible at least in the short run. Middle class is also burdened due to higher expenses, they generally don’t get any subsidies. Higher taxes on them would be highly damaging. Anyway, if they have more money into their pockets, they spend more, and the government gets indirect taxes on that, eventually. Although Congress does not seem to be proposing these drastic changes for generating money for the scheme in its manifesto, going into the general election, there is no other reasonable way forward. Rahul Gandhi’s NYAY scheme raises many questions and answers none.