The government may slightly tweak personal income tax slabs or offer a lower flat tax rate in the upcoming budget as it looks to revive the slowing economy.
There are reports which indicate that government is looking to incentivise individual taxpayers to put money in the hands of people in a bid to boost demand.
A finance ministry source, who spoke to India Today on condition of anonymity, said the government is “actively considering” the prospect of tweaking income tax slabs and help increase the disposable income of individual taxpayers.
While no major personal income tax changes are expected in budget, the source said that the government is planning some incremental changes in income tax slabs.
Though there is no confirmation on how it plans to rationalise tax slabs, the finance ministry is also expected to offer higher full tax rebate for individual taxpayers. The full tax rebate for income up to Rs 5 lakh can be enhanced to Rs 6.5 lakh.
It could also increase the standard deduction amount of Rs 50,000 by Rs 10,000 in lieu of specific allowances offered to salaried individuals.
In the present income tax structure, an individual earning up to Rs 2.5 lakh is exempt from paying taxes while a five per cent tax is applicable on incomes between Rs 2.5 lakh and Rs 5 lakh; a higher 20 per cent slab is in place for individuals who earn between Rs 5 lakh and Rs 10 lakh.
A 30 per cent tax rate is applicable for those earning above Rs 10 lakh. An additional surcharge is also levied by the government on people with income above Rs 50 lakh.
LOWER FLAT TAX RATE
The government could also offer a lower flat tax rate offered to individual taxpayers in lieu of exemptions, reported news agency IANS.
Unlike a tweak in income tax slabs, this could be similar to the corporate tax rate cut move where base tax was reduced to 22 per cent from 30 per cent if companies agreed to forego all exemptions and incentives.
A source who spoke to the news agency said, “While major changes in tax slabs could wait for some time, a scheme similar to the one implemented for the corporate sector is being examined for individuals too.”
However, the plan is yet to be finalised yet and discussions are still going on to understand its quantum and whether it could fit a tax structure that has three to four different slabs.
According to the IANS report, the government could look at a flat rate of tax between the 5 and 30 per cent income tax slabs. Quoting tax experts, the report said an ideal flat tax rate would be around 15-18 per cent that would be lower than the peak rate and the second rate of 20 per cent. According to the report, the lower flat rate of tax may be applicable for incomes up to Rs 50 lakh per annum.
The lower flat tax rates may appeal to only one category of taxpayers who want a higher share of monthly earnings in their hand. The report, however, added that such a move could result in a drop in household savings.
Despite multiple income tax proposals doing rounds, the government only has limited fiscal space to take any bold measures. Lower tax collections coupled with incomplete divestment targets have derailed the government’s revenue collection estimate for the year.
The government also has to focus on other areas of growth in order to boost the economy, estimated to grow at an 11-year-low of five per cent in 2019-20. One of the key reasons behind the falling GDP is a sharp fall in demand, especially in rural circles.
While tweaking income tax is a simple way to boost demand, the government also has to focus on a larger share to boost rural demand.
Many experts have suggested the government to boost expenditure in labour-intrusive industries including agriculture, manufacturing, construction and real estate to further boost demand.
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