Slash in personal tax rate to boost the consumption in the economy

The government may slash the personal income tax rate in the move to increase the disposable income in the hands of individuals. This increase will boost consumption, especially among the middle class, and thereafter will drive the economic growth in a positive direction. 

Recently, the government announced the corporate tax rate cut to boost investment in the country and business sentiments. It will also help to make India, a more competitive market globally. The consideration to reduce the personal tax rate will be a continuation of such reforms. 

The officials have been working on simplifying our 60-year-old Income Tax Act and rationalise tax rates in accordance with the recommendation of the Direct Tax Code (DTC) task force. The task force had already submitted the DTC report on the 19th of August 2019. The main objective of such simplification and rationalisation is to enhance tax compliance, expand the tax base, and make the taxpayer’s life easy. 

The reduction might impact government revenue negatively, therefore various scenarios are being considered by the government. But the intent is to give at least 0.5% benefit to each taxpayer in the country.

Among many other options, one is to introduce a 10% tax slab rate for the taxpayers having income between Rs 5 lakh and Rs 10 lakh. Currently, the tax slab rate applicable to such taxpayers is 20%. Also, the government may consider removing cess, surcharge, tax exemptions and reducing the highest tax slab rate to 25% from the current 30%. 

The official will present various options to the competent authority – with or without existing exemptions and it will take a final view and decide the timing of the announcement. 

Also Read: Everything you need to know about corporate tax rate cut this year

Experts are expecting this announcement before this Diwali to create demand and boost the country’s consumption. This boost will give rise to the overall economic growth.

Any reduction in the personal income tax rate will leave more money in the pocket of the taxpayers to consume more and will push the demand further. However, the government will have to measure its revenue figures and fiscal deficit aspects before announcing such amendments.

By reducing the corporate tax rate cut, it is expected that the overall supply will increase in the near future. To balance the supply and demand of the economy, the consumers should have more money at their disposal which will propel the consumption power. Therefore, the government should consider the personal tax rate cut, which could provide a much-needed stimulus to the economy.

For any clarifications/feedback on the topic, please contact the writer at komal.chawla@cleartax.in