India is considering a steep cut in income tax for those earning up to Rs 15 lakh per year in the budget due in February, two government sources told Reuters, in a bid to give relief to the middle class and boost consumption in an economy that is showing signs of slowing down.
This potential tax cut would help millions of taxpayers, especially city-dwelling residents burdened by mounting living costs. The idea creates an option to shift back to a 2020 tax system that smooths rates by wiping out an array of exemptions, among them those for housing rentals.
Under the 2020 regime, an assessee earning Rs 3 lakh to Rs 15 lakh in a year would pay between 5% and 20%, while above Rs 15 lakh, the rate would be 30%. At present, taxpayers have the option to choose either the older system that allows several exemptions or the newer, streamlined version that allows lower rates but fewer deductions.
Sources said that while discussions continue, no final decision has been taken on the size of any cuts. A final decision can be expected closer to the budget date of February 1. The finance ministry refused to comment on these deliberations. Specific figures on revenue loss from the tax cuts were not released, but one official suggested that the lower rates may boost usage of the newer, simpler system.
India is heavily dependent on the income tax contribution of those earning at least Rs 10 lakh and above at the rate of 30% of the total tax payers. A rise in disposable income of middle class can give a much-needed boost to the economic growth, which has reported its slowest growth in seven quarters, between July-September. Besides, the unabated high food inflation is hurting consumer demand across products-from FMCG to auto.
The government also feels the growing pressure from the middle class over high tax rates, especially in conditions when wage growth fails to keep pace with inflation.
