As the budget day draws near, economists like Pronab Sen and Sudipto Mundle have strongly argued against personal tax cuts arguing that government should use the money it has to invest and stimulate demand.
To discuss this in further detail and what the government needs to do in the budget to stimulate growth, CNBC-TV18 spoke with economists Indranil Sen Gupta, India economist at Bank of America Merrill Lynch and Samiran Chakraborty, chief economist at Citi, as well as tax expert Dinesh Kanabar, CEO of Dhruva Advisors.
Chakraborty said income tax cut would benefit only 2-3 percent of the population and may not be the best option to stimulate growth.
"Moreover, the cost of income tax cut would be 0.1-0.4 percent of gross domestic product (GDP). According to him, an alternative could be an excise cut on petrol, diesel, which would benefit a large number of people and may spur a bit of FMCG demand. It will be relatively small for each person but at least will be something which could be meaningfully spent,” said Chakraborty.
On the fiscal deficit number, Chakraborty said, “The challenge is find a balance between growth and macro stability at a juncture where we have a serious demand problem and have a problem where inflation is impacted by supply side shocks. So, the policy decisions are not going to be easy.”
“We are in an economy where the consumer is risk averse, the producer is risk averse, the financiers are risk averse. So, someone will have to take some risk. In that context, the government could look at a higher fiscal deficit and try to kick start the economy through that but it has to be targeted and temporary,” Chakraborty added.
Meanwhile, Kanabar said, the basic question is how to spur consumption and demand and the best way to do that is to raise threshold limits at the lower level.
Giving two recommendations to spur demand, Kanabar said, "My first recommendation would be to enhance the tax free limit from Rs 2.5 lakh to around Rs 4 lakh and from Rs 4 lakh to 7.5 lakh you tax 5 percent. Second, when we speak about what money that needs to be left in the hands of middleclass to spur consumption, we seem to forget the aspect that there is 43 percent rate of tax for income above Rs 5 crore. So, you are looking at a situation where you have pushed the needle from 35 percent to 43 percent, which is not only high rate of tax but it also does not send out the right sentiment and so, the amount of tax that you collect would be de minimis."
Therefore, my suggestion would be get the maximum tax rate down back to 35 and increase the threshold to Rs 4 lakh,” said Kanabar.
Sen Gupta is also of the view that it would be difficult to have large income tax cut if fiscal deficit has to be limited to 3.6% in FY21. “We are looking at a fiscal deficit around 3.8 percent this year, plus there is going to be slippage on the state side and if you want to limit the fiscal deficit to 3.6 percent next year. It’s not that easy to have a very large income tax cut,” he said.
“The other challenge would be to fund the tax rate cuts because it doesn’t make sense if yields go up and hurt from some other direction,” added Sen Gupta.