india

Updated: Jul 05, 2020 15:43 IST

The government is considering rationalising personal income tax rates in a move that will result in the increase of disposable incomes, especially among the middle class, and hopefully drive consumption and, therefore, growth, two government officials said on condition of anonymity.

The move comes after the government slashed corporate tax rates to boost investment and sentiment, and make Indian industry more competitive — a decision well received across the spectrum.

Government officials have been working on simplifying archaic income-tax laws and rationalising tax rates in line with recommendations of the task force on the Direct Tax Code (DTC), which submitted its report on August 19. The objective is to enhance compliance, expand the tax base and make lives of the taxpayer easy, the officials said.

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Depending on the impact the decision could have on revenue, various scenarios are being considered, the officials added. But the idea is to give at least a 5 percentage point benefit to every taxpayer, one of the officials said.

One of the options is to introduce a 10% slab for people having taxable income between Rs 5 lakh and Rs 10 lakh. Currently, this slab attracts a 20% tax rate. There are also options to remove cess, surcharge and several tax exemptions and reduce tax rate of the highest slab from 30% to 25%, the first official added.

Currently, taxable income between Rs 3 lakh and Rs 5 lakh attracts a 5% rate. A 20% tax is levied on the second slab (Rs 5-10 lakh taxable income) and 30% tax on income above Rs 10 lakh. Income up to Rs 2.5 lakh is, however, tax free.

“The job [of the officials] is to present various options -- with or without existing exemptions -- and present the same before the competent authority [political leadership] to take a final view, who will also decide the timing of the announcement,” the first official said.

According to the two officials, the recommendations of the task force on the Direct Tax Code will help. The government constituted the task force on the Direct Tax Code in November 2017 to review the existing income-tax legislation and to draft a new direct tax law in consonance with economic needs of the country.

Experts expect an announcement in this regard before Diwali, which will create demand instantly and boost consumption and therefore growth. India’s economic growth slowed to an over six-year low at 5% in the June quarter, the fifth straight quarterly decline in growth.

Deloitte India senior director Sanjay Kumar said: “Translation of personal income tax reduction to push the demand and consumption is very quick, as it leaves extra money in the pocket of the taxpayers. The government will, however, have to weigh properly its revenue figures and the fiscal deficit aspects.”

Taxmann DGM Naveen Wadhwa explained the need for such a move by pointing out that the cut in corporate tax will help manufacturing companies, but may not help boost consumer demand. “If more income is available at the disposal of the taxpayer, it will propel the consumption. Thus, the government should consider reducing personal tax rates.”

On September 20, the finance minister announced slashing of corporate tax rates for domestic manufacturers from 30% to 22%, while for new manufacturing companies the rate was reduced from 25% to 15%, provided they do not claim any exemptions.

Cyril Amarchand Mangaldas’ partner and head-taxation SR Patnaik said the government has taken several measures to boost the economy, including recent announcements to slash corporate tax rates. “In order to provide confidence even to the individual taxpayers, it would be a great idea to rationalise personal tax rates and could create a bullish environment which provides much-needed stimulus to the economy. We strongly believe that a further rationalised tax rate with 25% being the upper cap rate could be a great idea,” he said.

According to Wadhwa, it also makes sense to maintain some parity between individual and corporate taxpayers in terms of the rate.