Govt looks at income tax rate cut to boost demand, trigger private investment

By: Admin
June 18, 2024
Categories: Income Tax News|News
4 Min Read

As the Indian economy grapples with the problem of flagging consumption, policymakers in the government are in favour of rationalising the existing income tax structure, especially at lower income levels.

According to two government officials The Indian Express spoke with, it is likely that tax rate cuts for those earning less may likely take precedence over freebies or excessive welfare spending given the focus on fiscal consolidation.

The tax cuts may be a more efficient measure to enhance disposable income, which in turn would result in higher consumption, and give a fillip to economic activities, the officials said.

A boost to consumption is being seen as crucial for reviving demand, which in turn is central to restarting the investment cycle, especially rekindling private capital expenditure in consumer-focused sectors, an official explained. Of course, this could also add to GST collections, he said.

“This way (tax rationalisation), you will unlock consumption. There would be greater disposable income, means greater consumption, greater economic activities, more GST collection. So you may be actually activating more direct and indirect revenue collection. It would also mean more direct tax collection, also for corporations, because they would be having more income to report,” another official said.

The discussions have taken note that the rise in marginal income tax is “too steep” in the existing tax structure. “Right now, in the new tax system, your first slab of 5 per cent starts at Rs 3 lakh. By the time it goes to Rs 15 lakh, which is five times, the marginal tax rate jumps from 5 per cent to 30 per cent — a six fold jump. So while income goes up five times, the marginal tax rate goes up six times, which is quite steep,” the official said.

The revenue loss from any such measure requires a dynamic analysis, officials said. “Since it is expected to spur demand, it requires a general equilibrium analysis to assess the net effect. There will be more money in the hands of the people, leading to better consumption and more direct and indirect tax revenues. So even though revenue loss might be there, the net effect will be positive,” the official said.

Tax simplification is also being seen as a better tool than overt spending on welfare schemes, which may see possible leakages. “Our deficit is not too low. The poor cannot be benefitted at the cost of fiscal instability. Consumption should come from economic activities generated through appropriate government schemes and not voucher spend. It can be done through tax cuts, especially for lower income levels,” another official said.

The newly formed Bharatiya Janata Party-led National Democratic Alliance (NDA) is expected to present the full Budget for financial year 2024-25 by the third week of July.

While India has posted an average GDP growth rate of 7 per cent plus over the last three years, it is faced with significant challenges from muted agricultural growth, weak exports and lacklustre private investment amid flagging consumption demand. Private investment has not picked up across the board and subdued demand remains a concern for the Indian industry.

In the most recent GDP data release for the January-March quarter on May 31, Private Final Consumption Expenditure (PFCE), an indicator of consumption demand, dropped as a share of GDP to 52.9 per cent — the lowest level in the 2011-12 base year series. For the full financial year 2023-24, consumption expenditure grew by 4 per cent, the slowest growth rate in the last two decades excluding the pandemic year.

The government has been focusing on fiscal consolidation over the last few years, with an aim to bring down the fiscal deficit to 5.1 per cent of the GDP in 2024-25 and reduce it further to below 4.5 per cent in 2025-26. In her 2021-22 Budget speech, Sitharaman had outlined the goal of 4.5 per cent fiscal deficit by 2025-26. “We hope to achieve the consolidation by first, increasing the buoyancy of tax revenue through improved compliance, and secondly, by increased receipts from monetisation of assets, including Public Sector Enterprises and land,” she had said.

For the last financial year 2023-24, the government was able to curtail the fiscal deficit at 5.6 per cent of the GDP, lower than 5.8 per cent outlined in the revised estimates on account of better-than-expected tax revenues and lower subsidy payouts.

Source from: https://indianexpress.com/article/business/economy/govt-looks-at-tax-rate-cut-to-boost-demand-trigger-private-investment-93