At a time when economic growth is trending southwards and consumption has taken a hit, hopes are high that finance minister Nirmala Sitharaman will announce some incentives in the upcoming budget. With the recent cut in corporate tax from 30% to 25% aimed at boosting private investments in the economy, taxpayers are expecting some relief on the income tax front as it could increase disposable income in the hands of consumers. Disha Sanghvi and Ashwini Kumar Sharma ask experts if the government has room to accommodate further tax cuts considering the widening fiscal deficit
Kuldip Kumar, partner and leader, personal tax, PwC
Consumption a key concern despite the challenges
With the recent cuts in corporate tax rates, there is a lot of expectation that taxpayers may get some relief in the budget. Although the government may face some challenge on the fiscal deficit side and there may hardly be any head room to accommodate such demands, it may try to put more money into the hands of the taxpayers, particularly the lower- and middle-income group.
The question is: how will the government bring these changes? It may tweak the tax slabs, increase the deduction for housing loan interest, raise the 80C limit, and so on, which will help ease the taxpayers and improve the sentiment. While this may result in a dent in the fiscal deficit, the government will not let it go unaddressed. It will perhaps present a road map to bring back the fiscal discipline in the coming few years. What finally happens remains to be seen but growth, employment, pushing the consumption and improving the sentiments will be the key areas that the budget will address.
Shyam Sekhar, Chief ideator and founder, iThought
Cut in personal tax will come back to govt in the form of GST
The government’s FY20 revenue numbers may not support the case for tax cuts. The decision will be driven by the need for the right signalling.
The loss of direct tax revenues will be compensated for by indirect tax mobilization. The government will certainly plug leaks, connect goods flows and raise GST (goods and services tax) compliance significantly. What the government gives away by way of tax cuts will come back as GST revenues.
The fiscal deficit could widen and the extent will depend on the success of other means of mobilization such as strategic disinvestment. Investors, domestic and global, must feel a sense of urgency to invest aggressively. The best way to achieve that is to send out the right signals. The government should be signalling right and then expect the economy to show better GDP growth, revival in tax revenues and strong investment resurgence. The risks of slippage does exist but given the state of the economy, taking those risks is the only alternative.
Madan Sabnavis, Chief economist, CARE Ratings
Tax cuts at lower end will not galvanize demand
The government has limited room to cut taxes this time. Corporate tax rates have already been cut and the impact is still nebulous, though it’s too early to judge. Cutting income tax rates does sound logical but given that income tax collections tend to be fixed unlike other taxes, which are dependent on consumption (GST) or performance (corporate taxes), lowering taxes will result in lower collections as the taxable base is unlikely to grow significantly given the slow GDP growth and, hence, job creation.
But the government is expected to be more flexible with the Fiscal Responsibility and Budget Management target and go for a higher fiscal deficit. The choice is between deploying additional funds in infrastructure (capex) and taking revenue cut but giving more to the taxpayer.
Even if the government considers cutting tax rates, it has to be on the upper end of the income where there is higher consumption power. Cutting taxes at the lower end will not help in galvanizing demand.
Naveen Wadhwa, Deputy general manager, Taxmann
With existing revenue loss, there may not be further cuts
The government set the target for GST and income tax collection for FY20 at ₹6.6 trillion and ₹13.35 trillion, respectively, in Budget 2019. It appears that this revenue target may not be achieved amid the current economic slowdown and recent cut in the corporate tax rate. In an unprecedented decision to boost investment in India, the government also reduced the corporate tax rate to 15% and to 22% for newly incorporated manufacturing companies and other domestic companies. This decision will result in a revenue loss of ₹1.45 trillion, according to the central government.
We wish the government slashes the tax rates in Budget 2020 to boost consumption, which is one of the key factors for GDP growth, but this wish may not turn into reality considering the recent reduction in corporate tax rate and lower tax collection till the third quarter of the current financial year. The two measures may have already caused revenue loss and so the FM may not be able to afford further cuts.