Samosas, chai and a stormy night discussion on how the Union Budget affects the economy

Now that he was up, he knew that he wouldn’t get sleep until the thunder stopped. And even after that, there were no guarantees. His wife, Mairaa, continued to sleep peacefully. She could sleep anywhere—flight, train, bus, airports, railway stations, office, her mother’s place, his mother’s place—as long as she had decided that she had to sleep.

As he lay on the bed letting one thought after another hit his mind, there was another loud burst of thunder. And that woke her up. “What was that?" she almost screamed. “What did you break now V?"

“Nothing," he replied.

“Then?"

“The gods are unhappy with us."

“Gods?"

“It’s thundering."

“Oh," she said. “Why don’t you make some tea? There are some samosas left over from yesterday."

“Samosas?" he asked. “At 2.30am?"

“Why not?"

“Wouldn’t your intermittent fasting go for a toss?"

“Doesn’t matter."

Ten minutes later, they were both sitting around the dining table, sipping tea and eating samosas.

“So, the Union Budget will be presented on 23 July," said Vivaan, who worked as a mid-level engineer in an IT company.

“You want to talk about the budget at 2.40am?" asked Mairaa, who was taking a break from corporate life to complete her PhD in economics.

“Well, if we can have tea and samosas, then why not?" asked Vivaan.

“Sure."

WhatsApp Analysis

I have been hearing that the finance minister might cut income tax rates or increase the tax slabs in the budget," said Vivaan.

“Hmmm."

“That’s a good move. Only a very small portion of Indians actually pay tax. The government needs to take care of them as well."

“Ah," said Mairaa. “Have you started getting your analysis from WhatsApp?"

“Why?"

“Because that’s totally incorrect."

“Is it?"

“Yes. Only a small portion of Indians pay income tax. But that does not mean that only a small proportion pay tax."

“As in?" asked Vivaan.

“Data from the Controller General of Accounts shows that in 2023-24, the gross tax revenue earned by the union government stood at ₹34.6 trillion," said Mairaa.

“What’s gross tax revenue?"

“It’s basically the money earned by the union government through different taxes."

“And what are these taxes?"

“There is personal income tax that you and I pay. There is income tax that corporations pay. Then there is goods and services tax (GST) which both corporations and individuals pay. There is customs duty, which primarily consists of money earned through taxes on imports. And finally, there is central excise duty, which the government earns on production of goods and sometimes their sales as well. Through these taxes, a bulk of the gross tax revenue is earned," explained Mairaa.

“So, why is the idea of only a small portion of Indians paying tax wrong?"

“Now, in 2023-24, the union government earned ₹34.6 trillion through different taxes. Of this, ₹10.1 trillion was earned from personal income tax."

“That’s a little over 29% of the gross tax revenue," said Vivaan, quickly running the figures on his mobile phone.

“Further, the government earned ₹9.1 trillion from the income tax paid by corporates or a little over 26% of the gross tax revenue," said Mairaa.

“Okay."

“Well. The remaining ₹15.4 trillion, or 44.5% of the gross tax revenue, was earned primarily through GST, excise duty and customs duty. On the whole these taxes are referred to as indirect taxes."

“Okay."

“These taxes are built into the price of a product or a service that is being sold, because the idea behind any business is to make a profit."

“Hmmm."

“Hence, the end customer buying any product or service is ultimately paying for these indirect taxes, though they may not realise this," explained Mairaa.

The Lesson in Fuel

Can you give me an example?" asked Vivaan.

“On 1 July, the retail selling price of petrol in Delhi was ₹94.72 per litre. Of this ₹19.9 was the excise duty, surcharge and cess, charged by the union government."

“I never knew that," said Vivaan.

“Well, if all your free time goes into playing PUBG, this is what happens."

“You know I only have two addictions in life, Mairaa."

“I will let that go," said Mairaa. “Also, other than the central excise duty, the state governments also charge a value added tax (VAT) on petrol."

“Oh. There’s more."

“In Delhi, the state government’s VAT amounts to ₹15.39 per litre. This VAT varies from state to state, which is why the price of petrol varies across the country."

“Hmmm."

“Effectively, every time you and I and others buy petrol or diesel, we are paying these taxes. The central government taxes and VAT are built into the price of diesel as well. And many more people own motor vehicles in comparison to people who pay income tax."

“But what about those who do not own motor vehicles?"

“Fair question. Now, companies spend money in moving goods around from their place of production to their place of demand. It costs them money to do so. They may hire trucks or railways to do this. Both railways and trucks owners spend money to buy diesel or electricity. So, they do end up paying indirect taxes. This cost is built into the price they charge companies to move around goods. The companies, in turn, build this into the price they charge their end customers. So, end consumers bear the cost of indirect taxes."

“Makes sense," replied Vivaan.

“Of course, it does," said Mairaa. “You are not the only one who learns things from WhatsApp forwards and so, this is not the first time I am explaining this."

Who pays the most?

But these are indirect taxes you are talking about. And they form only 44.5% of the gross tax revenue."

“Yes."

“Personal income tax and corporate income tax make up for the remaining—more than 55%."

“Yes."

“And personal income tax in 2023-24 had formed around 29% of the gross tax revenue. So, doesn’t that mean that a substantial portion of the tax collected by the government is paid by those who pay personal income tax?"

“It’s not so simple V."

“Do explain."

“Let me share some data for assessment year 2022-23, which is the latest data available. While any income is earned during the course of a financial year, it’s assessed and the income tax return is filed in the next financial year. So, assessment year 2022-23 refers to the income earned during the financial year 2021-22."

“Why not just say 2021-22 then?" asked Vivaan.

“Well, I was trying to impress you."

“But why?"

“Never mind. So, data from the income tax department released in September 2023, shows that in assessment year 2022-23, that is financial year 2021-22, around 68.5 million individual income tax returns were filed."

“I told you it’s a very small number."

“Of this, 42.1 million or 61.5% of return filers paid no tax."

“Wow."

“Another 20.2 million or 29.5% of the tax return filers paid an income tax of up to ₹1,50,000. On an average, they paid a little over ₹38,959 in tax. In total, this amounted to around ₹78,726 crore or 13.8% of the ₹5.7 trillion of income tax paid by individual income tax payers on income earned during the financial year 2021-22."

“Okay."

“So, that leaves around 6.2 million individual taxpayers who paid ₹4.9 trillion or more than 86% of the income tax paid by individuals."

“Hmmm," replied Vivaan.

“Data from the World Bank shows that in 2022, India’s population was expected to be at 1.42 billion."

“Yes."

“Of these, only 6.2 million or around 0.4% of the overall population pay more than 86% of the individual income tax."

“Oh. Precisely the point I was trying to make yaar."

“So, around four out of 1,000 Indians pay a bulk of the income tax paid by individuals."

“Of course," replied Vivaan, with the ‘I told you so’ smile on his face which Mama’s boys tend to have when they ‘think’ have been proven right.

Twist in the Tale

Can I ask you a question V?" asked Mairaa, changing track.

“Yes," said Vivaan, slightly confused.

“What kind of books do I love reading the most?"

“Crime fiction books."

“Yes. But can you get a little more specific."

“Police procedurals where an unhappy middle-aged inspector is trying to solve a murder, which seems almost impossible to solve."

“More specific?"

“Probably, books in which the city in which the murder is being investigated is such an important part of the story that it seems like a character itself. You know Michael Connelly’s Los Angeles. Ian Rankin’s Edinburgh. Henning Mankell’s Ystad."

“Even more specific?" asked Mairaa.

“Books that end with a twist, so well-hidden that the reader doesn’t see it coming."

“Yes," exclaimed Mairaa.

“So, what’s the twist here?" asked Vivaan.

“Now, what does income tax paid by individuals comprise of?"

“Income from salary."

“What more?"

“Interest income from fixed deposits and other deposits."

“More?"

“Income earned by freelancers like you."

“Yes."

“Income from buying and selling stocks, real estate etc."

“More?"

“Rental income."

“Yes. Now, who pays the salaries?" asked Mairaa.

“Companies and businesses which employ people,"replied Vivaan.

“Yes. And where does that money come from?"

“The money they earn through selling the products they make, or the service they have to offer?"

“Yes."

“And who pays for these products and services?"

“The end consumer."

“So, what does that mean?" asked Mairaa.

“The end consumer indirectly pays for the salaries being paid, and hence, the income tax that needs to be paid."

“Yes. Now, the same logic applies to incomes earned by freelancers. They are paid through money earned from a business activity, for which the end consumers are willing to pay."

“Yes."

“Or take rental income. Many people pay home rents through their salaried income. So, the end consumer indirectly pays the salary, and that salary in turn pays the rent, on which an income tax has to be paid," explained Mairaa.

Identifying first-order effects in economics is easy. The real game is in understanding the second-order and third-order effects.

“Now, what about income earned from the buying and selling of shares or the buying and selling of homes?" asked Vivaan.

“We bought this flat that we live in. How did we fund it?"

“The down payment came from our savings and we took on a home loan."

“How did we accumulate savings?" asked Mairaa.

“We saved some of our income."

“Yes. How did we earn an income?"

“Okay, I get it," replied Vivaan. “But what about shares?"

“Well, when you buy shares, where do you get the money to pay for them?"

“From my income. Or from my savings."

“Yes.."

“Okay, I get it," interrupted Vivaan, before Mairaa could complete what she was trying to say.

“Wasn’t that some twist?" asked Mairaa.

“It was. But how did you have all the figures at hand?"

“Oh, that’s a small part of the PhD thesis I am writing."

“Maybe I should read it."

“You should. Basically, identifying first-order effects in economics is a child’s play. It’s the second-order effects, third-order effects and the nth-order effects, where the real game is."

“And you seem to be the master of that game," said Vivaan. “Directly or indirectly, the budget and taxes impact everyone. Though given that I work in an IT company, my salary gets paid because of foreign customers and not Indians."

“There are always exceptions to the rule, my dear, which is why my analysis is never picked up from social media."

Also read | How to explain the Budget to your grandma

The thunder had mellowed down but it was still raining heavily. More lights in the building had come on. The monsoon in the city that never sleeps was keeping people awake.

(The example is hypothetical).

Vivek Kaul is the author of Bad Money.

Note: We are reissuing this piece, originally published in January 2024, in the run up to Union Budget 2025-26.