With the next budget of the Centre less than two months away, one thing the government can do to revive the economy is cut personal income tax rates or increase the tax slabs and thus put more money in the hands of people. Mint looks at the possible impact.

1) Will cutting personal income tax rates help?

This is the fastest way of putting more money in the hands of people and thus giving them the opportunity to spend more. With more money in their hands, people are likely to spend it. This spending will benefit other individuals as well as businesses. Increased personal consumption will push up economic growth. With increased spending, the government’s collection of goods and services tax may improve, too. It may, over a slightly longer term, also lead to businesses expanding and creating jobs. However, one argument that is constantly made against such a step is that not many Indians pay income tax.

Graphic: Paras Jain/Mint
Graphic: Paras Jain/Mint

2) What is the number of income taxpayers?

A taxpayer is a person who has filed an income tax return. He or she can also be a person in whose case income tax has been deducted at source during the fiscal, but one who has not filed a return. Income tax returns for the income earned during fiscal 2017-2018 were to be filed during assessment year (AY) 2018-2019. In AY 2018-19, the number of income taxpayers stood at 84.6 million (see chart). This included individual income taxpayers and business entities. The number of taxpayers in 2009-10 had stood at 36.3 million. The number of taxpayers has grown at the rate of 9.9% a year.

3) How many are individual income taxpayers?

Of the total 58.7 million income tax returns filed in the 2018-19 assessment year, 94%, or 55.3 million, were done by individuals. Applying the same proportion on 84.6 million income taxpayers, around 79 million are individual income taxpayers. But just because someone is filing a return doesn’t mean he or she is paying tax.

4) How many individual taxpayers pay tax?

Of the 55.3 million individual income tax filers, around 22.4 million did not pay any tax. This means around 60% of individuals who filed income tax returns paid tax. Applying the same proportion of 60% on 79 million individual income taxpayers, around 47.4 million paid income tax. While 47.4 million does not seem to be a huge number, we need to consider that many of these individuals represent a household, given the low female labour participation rate in jobs. An average Indian household has five individuals.

5) Will a cut in individual income tax rates help?

People who pay income tax form a large proportion of those who have real purchasing power in the Indian economy. If they are encouraged to spend, the incomes of others will go up as well and the multiplier effect will benefit the entire society. In the case of a corporate income tax rate cut, the spending decision of the individual depends on whether companies reduce prices or not. That is clearly not the case here.

Vivek Kaul is an economist and the author of the Easy Money trilogy.

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