India's Budget 2024: Centre considers lowering personal tax rate
The Indian government is considering a reduction in personal tax rates for certain income groups, aiming to stimulate consumption in Asia's third-largest economy, according to two government sources who spoke to Reuters. The proposal could be unveiled in July when Prime Minister Narendra Modi's administration presents its first federal budget following the Bharatiya Janata Party's (BJP) failure to secure a majority on its own. A post-election survey indicated that voters were concerned about inflation, unemployment, and declining incomes.
Tax cuts aim to increase middle-class savings
Despite the Indian economy growing at an impressive 8.2% in 2023-24, consumption has only increased at half that rate. Modi has stated that his government will focus on enhancing middle-class savings and improving their quality of life. A decrease in personal tax could potentially boost economic consumption and increase middle-class savings, Reuters reported, citing the government sources.
Proposed tax relief for high-income earners
The individuals who may benefit from this tax relief are those earning over ₹15 lakh annually. The proposed changes could modify a tax scheme introduced in 2020, where annual income up to ₹15 lakh rupees is taxed at 5%-20%, while earnings over this amount are taxed at 30%. The current system sees a six-fold increase in personal tax rate when an individual's income increases five times from ₹3 lakh to ₹15 lakh, which is considered steep by Reuters's source.
Lower tax rates may offset revenue loss
The government is also considering lowering personal tax rates for annual incomes of ₹10 lakh under the old tax system. Any loss of tax revenue due to these cuts could be partially offset by increased consumption from these income earners. The federal government aims for a fiscal deficit of 5.1% of GDP in FY25. Strong tax collections and a substantial dividend from the central bank will provide the government with flexibility in planning the first budget of its new term.
Policymakers favor rationalizing income tax structure
As the Indian economy grapples with flagging consumption, policymakers are in favor of rationalizing the existing income tax structure, particularly at lower income levels. In the pursuit of fiscal consolidation, the government is likely to prioritize tax cuts for low-income individuals over freebies or excessive welfare spending. This move is expected to boost disposable income, leading to increased consumption and economic activity.
