Next govt stimulus may cheer the middle class4 min read . Updated: 08 Dec 2019, 11:21 PM IST
- A tax slab rejig may increase disposable income on earnings above ₹5 lakh
- Leaving more money in the hands of people through a tax break could revive consumption
New Delhi: A restructuring of personal income tax rates could cheer the middle class, boost consumption and act as a fiscal stimulus, if ongoing discussions in the finance ministry lead to concrete proposals in the Union budget.
Finance minister Nirmala Sitharaman had said in response to a question at the Hindustan Times Leadership summit on Saturday that relief on personal income tax was among the several things the government was looking at, and that one should wait for the Union budget to be presented in February.
Since those with taxable income of up to ₹5 lakh are already receiving a full tax rebate, a revamp of the slab system is likely to leave more disposable income in the hands of those earning more than this, up to an extent.
One template before the finance ministry is the revamped personal income tax slabs proposed in the draft direct tax code prepared by Akhilesh Ranjan, former member of the Central Board of Direct Taxes. The report has not been made public yet, but Mint reported on 19 August that it had proposed changes in personal income tax slabs to benefit middle and upper middle class Indians.
However, considering the weak tax revenue position, the government may seek to offset the revenue loss from relief given to one section of taxpayers with higher receipts from those at higher income levels or by tightening the rules on evasion-prone incentives.
Talk about a new 35% tax slab for those earning ₹2 crore or more has been doing the rounds in recent weeks. “There has been contradictory news reports on the DTC proposals. We would not like to comment on it," a member of the Ranjan panel said on condition of anonymity. Tightening the rules to check evasion is another way of boosting revenue. Misuse of tax breaks given to charitable trusts and to the farm sector have always been a headache for the tax department.
“Leaving more money in the hands of people through a tax relief could revive consumption, which will in turn, encourage businesses to invest more and eventually, the health of corporate houses will improve. That is a good strategy, one of the remaining things to be done," said Amit Maheshwari, partner at Ashok Maheshwary and Associates Llp.
Economists said taxation is the easiest way of administering a stimulus. “Unlike an expenditure stimulus, a tax stimulus is always reversible and is the easiest and the quickest to administer. That is why I believe the corporate tax reduction should also act like a stimulus in the medium to long term," said N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy, a think tank.
Economists, however, remain divided over trying to stimulate the economy through personal income tax relief as only 6% of the 1.39 billion people in the country pay income taxes. According to former chief statistician of India Pronab Sen, the country is at a stage where income generation is needed at the lowest level. An income tax break does not address the fundamental issue, he said.
“By giving a tax break, you are giving up a certain amount of revenue and expanding the fiscal deficit," Sen said in an interview. “You are better off not doing it and instead, by expanding the expenditure by exactly the same amount and spending it in a manner so that the money reaches the poor. Tax breaks can wait. Indian middle class has not seen a massive erosion in their income levels. They can wait. The poor cannot." Sen also said that the sentiments of the middle class do not matter. “The only sentiment that matters is that of the investors on the one hand and of the general households on the other, who are taking a decision on how much they need to save for tomorrow and how much they need to spend today," he added.
The Modi administration has over the years tried to make personal income tax more progressive by giving relief to small earners and raising tax incidence progressively at higher income levels. In her first budget in July, Sitharaman proposed an increase in surcharge levied on income tax outgo of individuals with earnings more than ₹2 crore, in two slabs. It was raised from 15% to 25% where the income is in the range of ₹2-5 crore and from 15% to 37% for those earning more. The surcharge increase, described by many as a “super rich tax" had invited mixed reactions, with some saying that it would damage the investment climate.
“A reduction in the tax rates for individuals if appropriately brought about (say, for middle income slabs/taxpayers) can give an immediate boost to consumption, which is the need of the hour," said Pranav Sayta, partner at E&Y. “Indeed, such a tax rate reduction is likely to adversely impact government finances and the fiscal deficit, but given the current state of the economy, this may on balance still be the lesser evil, given the critical need for a fiscal stimulus to revive growth and employment generation at this stage. In fact, if this step does succeed in arresting and reversing the steep decline in growth rates, it could lead to a pick-up in revenue collections over the medium term."
Shreya Nandi contributed to this story