Income Tax Cut Unlikely Due To Fiscal Stress, India Slowdown
An employee holds Indian rupee banknotes while writing on a notepad in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Income Tax Cut Unlikely Due To Fiscal Stress, India Slowdown

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The Narendra Modi government is unlikely to moderate personal income tax rates for the rich due to the fiscal stress emanating from the corporate tax cuts amid an India slowdown, sources said.

The government has already given several exemptions to taxpayers, including making incomes of up to Rs 5 lakh tax-free.

Pressure has been mounting on the government to cut personal income tax rates to boost consumption, a major growth driver for the Indian economy. Rural comsumption in India dipped to 5 percent in the quarter ended September from 20 percent in the year-ago period, according to a Nielsen report released on Oct. 17.

According to sources, an income tax cut is difficult at this juncture due to multiple factors, including lower tax realisation and subdued GST collections.

India’s GDP growth at a six-year-low in April-June 2019-20 prompted Finance Minister Nirmala Sitharaman to announce multiple economic reforms—corporate tax cuts, public sector bank mergers and a rollback of the so-called “super-rich tax" on foreign investors—all of which are likely to have a bearing on government revenue.

For 2019-20, the government has set a higher revenue mobilisation goal of Rs 13.80 lakh crore. It has also set itself a disinvestment target of Rs 1.05 lakh crore for the ongoing financial year, as well as a fiscal deficit target of 3.3 percent.

The government needs higher revenue to spend on social security schemes like Ayushman Bharat, Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), PM-KISAN, and Pradhan Mantri Awas Yojana (PMAY), among others.

It is also gradually increasing spending on social security and reducing tax burden on lower income earners, sources said.

Interestingly, a panel on Direct Tax Code in its report favoured an income tax cut, simplification of procedure, and improving compliance with a view to raise revenue from direct tax. The share of direct taxes to India's total tax revenues peaked at 61 percent in 2009-10 and has since stabilised at around 55 percent last year.

Tax revenues make up around 11 percent of nominal GDP, within which the share of direct taxes has hovered around 5.5-6 percent of GDP in the past three-four years.

Personal income tax collections amounted to Rs 4.7 lakh crore last year, or 2.5 percent of GDP. This year's target for personal income tax is budgeted to rise by an ambitious 23 percent compared to a subdued 10 percent growth in 2018-19.

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