India Considers Cutting Income Tax for Some While Scrapping Exemptions
Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

India Considers Cutting Income Tax for Some While Scrapping Exemptions

(Bloomberg) -- India is considering tax relief for individuals as it looks at measures to accelerate consumer demand and boost economic growth, people with direct knowledge of the matter said.

Prime Minister Narendra Modi’s government is mulling a proposal to hike the taxable income limits, especially the 1 million rupee slab, which attracts a 30% rate at present, the people said, asking not to be identified as the discussions are private. The move will be accompanied by scrapping some tax breaks, including the one offered on house rent payments and interest earned on some bank deposits.

The measures may form part of the federal budget to be unveiled in February, the people said. A spokesman for the finance ministry couldn’t be immediately reached for a comment.

If the government tinkers with personal taxes, it will add to the list of measures taken in recent months to boost growth that’s expanding at the slowest pace in nearly six years. Apart from last month’s cut in corporate taxes, the government has also rolled back a levy on foreign funds, injected $10 billion into banks, relaxed foreign direct investment rules, and merged state-run lenders.

A steep reduction in corporate tax rate to 22% meant companies pay taxes at a lower rate than many individuals who are in the top 30% rate bracket. That’s raised the clamor for a relief in personal income tax rates.

As Finance Minister Nirmala Sitharaman aims to narrow the fiscal deficit to 3.3% of the gross domestic product this year, the government has limited fiscal space for fresh giveaways after the $20 billion corporate tax stimulus. It’s now banking on companies and individuals to boost consumption and add to revenue collections.

Personal tax kicks off on income above 250,000 rupees a year, levied at 5%. Top marginal tax rate in India is 42.74% for income above 50 million rupees. That’s higher than the Asia average of 29.99%, according to data compiled by KPMG. Only about 5% of the population pays taxes and the country’s tax-to-GDP ratio of about 11% ranks lower than the global average.

©2019 Bloomberg L.P.

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