Govt may cut income tax rate to boost demand, rekindle capital expenditure: Report

The middle class may get some relief as the income tax rate is likely to be revised. As per Indian Express, policymakers in the government are in favour of rationalising the existing income tax structure, especially at lower income levels.

Income Tax rate

The Indian Express report quoted two government officials and said that it is likely that tax rate cuts for those earning less may likely take precedence over freebies or excessive welfare spending given the focus on fiscal consolidation.

This comes as the government is aiming to boost consumption by cutting rate that would enhance disposable income. As per Indian Express, a boost to consumption is being seen as crucial for reviving demand, which in turn is central to restarting the investment cycle, especially rekindling private capital expenditure in consumer-focused sectors

This could also add to GST Collections. “This way (tax rationalisation), you will unlock consumption. There would be greater disposable income, means greater consumption, greater economic activities, more GST collection. So you may be actually activating more direct and indirect revenue collection. It would also mean more direct tax collection, also for corporations, because they would be having more income to report,” an official told Indian Express.

At present, the rise in marginal income tax is “too steep”. “Right now, in the new tax system, your first slab of 5 per cent starts at Rs 3 lakh. By the time it goes to Rs 15 lakh, which is five times, the marginal tax rate jumps from 5 per cent to 30 per cent — a six fold jump. So while income goes up five times, the marginal tax rate goes up six times, which is quite steep,” the official told Indian Express.

Tax Simplification

This Tax simplification is also seen as as a better tool than overt spending on welfare schemes, which may see possible leakages. “Our deficit is not too low. The poor cannot be benefitted at the cost of fiscal instability. Consumption should come from economic activities generated through appropriate government schemes and not voucher spend. It can be done through tax cuts, especially for lower income levels,” another official told Indian Express.

The newly formed government under Prime Minister Narendra Modi is expected to present the full Budget for financial year 2024-25 by the third week of July.

Also watch: Full budget likely to be presented on July 22: Report