Amid falling GDP and poor tax revenue, will govt put more money in taxpayers’ hands?

More dispensable incomes mean people will spend more, which would lead to more money in the economy.
Amid falling GDP and poor tax revenue, will govt put more money in taxpayers’ hands?
Amid falling GDP and poor tax revenue, will govt put more money in taxpayers’ hands?
Written by :

With Finance Minister (FM) Nirmala Sitharaman set to present the Union Budget 2020 in a week, all eyes are on the government on how it will address the economic slowdown India has been facing for the past year.

The GDP has been forecasted to dip to a 11-year low of 5% in this financial year, and inflation was at a 5-year high of 7.35% in December. The automobile industry faced one of its worst slumps in 2019. FMCG sales fell, manufacturing fell, and vegetable prices went through the roof. Against such a backdrop, the country is currently in need of major stimulus, both to spur investment and to improve the consumer sentiment.

In the past one year, the FM announced several measures to try and spruce up growth in the economy. This included several sops for the real estate sector, and a cut in corporate tax.

One of the biggest stimulus measures to revive demand would be bringing more money into the hands of consumers. More dispensable income would mean people spend more, which would mean more money in the economy.

“While the corporate tax cut is expected to spur investments over the medium term, markets are expecting the government to cut personal tax rates which will help consumption demand,” Jyoti Roy, DVP Equity Research Analyst, Angel Broking says.

So, would that mean that we could expect a cut in personal income tax?

Currently, individuals earning an income of up to Rs 2.5 lakh per annum are exempt from paying tax. Those earning between Rs 2.5-5 lakh per annum are taxed at 5%, those earning up to Rs 10 lakh are taxed at 20% and for income above Rs 10 lakh, a 30% tax on income is charged.

In the previous interim budget on February 1, 2019, the government, instead of increasing the basic tax exemption, enhanced tax rebate to Rs 12,500. This meant that those having an income below Rs 5 lakh, effectively didn’t pay tax.

While it is important to revive demand, tax experts and economists believe that any cuts in personal income tax may not be the best idea for the government right now. This puts the government in a spot, since it is something that is required to boost demand and yet is very difficult.

Archit Gupta, Founder and CEO of ClearTax says that the government is currently in a tricky situation this budget with slowing consumption and falling GDP, combined with poor tax collections.

The government currently doesn’t have the fiscal space for a major relief in direct tax. This is because, direct tax collections as of January 15 were 5% down at Rs 7.3 lakh crore. Moreover, the cut in corporate tax that was announced last year is estimated to cost the government Rs 1.45 lakh crore, further affecting tax revenues. GST collections too, haven’t been as high as expected.

In such a scenario, Archit says, “offering tax cuts would be extremely difficult yet may be required to give consumer demand a strong push. The government may be tempted to offer tax cuts and they may attempt to keep impact neutral on revenues by raising taxes elsewhere.”

Aditi Nayar, principal economist at ICRA told ET that a cut in personal income tax may not boost the economy as much as increasing government spending. According to her, that may not be an appropriate move at this point and the government should instead focus on capital assets and focus on allocating more money towards rural areas for schemes such as the MGNREGA and the PM-KISAN.

So, what can the government do?

Tax and investment expert Balwant Jain believes that the government may offer limited relief and is unlikely to raise the basic tax exemption substantially.

“The government doesn't want too many people to go out of the tax net. At the most, the limit may be increased to Rs 3 lakh, but I don’t foresee anything beyond that,” he adds.

Balwant feels that the government can instead change the personal income tax slabs a little.

“Currently, the tax rate is 5% for income upto Rs 5 lakh and then it steeply rises to 20%. I feel that the government should make it 10%. And I feel that people who earn beyond Rs 1 crore per annum should be charged at 40%,” he says.

Archit’s expectations are on the same lines. “We are expecting the government to offer some personal tax relief by reducing tax incidence, which could be done by rationalising tax rates. There is no 10% tax slab (from 5% the next rate of tax is 20%, and an in-between rate of 10% should be considered) and it could be included in the Budget for a certain income bracket.”

However, Balwant Jain is of the opinion that a cut in personal income tax will not greatly affect the country’s tax collection. “Of the total tax collection in the country, 50% comes from GST and excise, and of the balance 50%, a substantial portion is from corporates and HNIs (high net worth individuals). So, I wouldn’t suggest giving any relief to HNIs. It should be given to the marginalised taxpayers, which I don't think will greatly influence the collection of the government. Contribution of individual tax players is not substantial enough to significantly affect tax collection of the government. Moreover, since corporate tax has been reduced, it would be irrational and illogical to tax individuals at higher rate than whats applicable for corporates,” he adds.

Archit also says that that raising 80C limit (currently at Rs 1.5 lakh to Rs 2 lakh or Rs 2.5 lakh) would also lower tax burden, improve disposable incomes as well as increase household savings. 

One major reason for the slowdown in the economy is demand. “This is a demand-induced recession. So if people have more money in their hands, they will spend and that will boost demand in the economy,” Balwant Jain adds. 

Related Stories

No stories found.
The News Minute