Sudhakar Sethuraman and Vinit Turakhia
Growth drivers are the recipe for the Indian economy to transform from its present state to becoming a $5 trillion economy by 2024-25.
Towards this direction, the government reduced the headline corporate tax rate by 8 percent to 22 percent in September 2019. The move could help increase the profits of companies and boost investments. However, creating demand by increasing the purchasing power of people will contribute towards a long term sustained growth for the economy.
The demand side can be addressed by increasing the disposable income of people. One way to do this is by reducing personal income tax rates. At a recent event, the Finance Minister has indicated that the government is looking at suggestions on the relaxation of personal income tax.
The 2018 and 2019 Budgets saw various amendments impacting personal taxes. Illustratively, Budget 2018 reintroduced standard deduction (of Rs 40,000) while this limit was enhanced to Rs 50,000 in Budget 2019.
This, however, did not provide additional deduction as it was brought in place of deductions for medical reimbursements and transport allowance that were scrapped. These Budgets also saw the quantum of the deduction for medical insurance for senior citizens and that for specified diseases being increased from Rs 30,000 to Rs 50,000 and Rs 60,000 (for senior citizens)/Rs 80,000(for very senior citizens) to Rs 100,000 (for any type of senior citizen) respectively.
Another notable feature of Budget 2019 was that it paved way for those earning up to Rs 5 lakh to be tax-free, i.e. there would be no tax levy up to this limit. Home owners had reasons to cheer too as the provisions relating to tax on notional rent for the second self-occupied property were omitted.
While the 2018 and 2019 Budgets saw a number of beneficial proposals for the individual taxpayer, they also had their share of tax garnering measures that could negate the benefits.
Some of these include limiting the set-off of house property losses to Rs 2 lakh, levy of 10 percent tax on long term capital gains (LTCG) exceeding Rs 1 lakh (though with grandfathering provisions), hike in cess from 3-4 percent, graded surcharge rates with a peak hike of 7 percent for income exceeding Rs 5 crore, etc.
The above together with the current global economic slowdown might result in gloom among customers and it is imperative that this is corrected at the earliest.At the cost of repetition, tax cuts could be the fastest and most direct means to achieve this. The government could consider the following for bringing about the reduction in tax outgo for the common man:
Relief in personal income taxes could result in people having more money on hand thus encouraging them to spend more. This increased spending could benefit the wider stakeholders thereby contributing to economic growth and collection of goods and services tax.
While it is seen that the government is looking at matching the growth and spending pattern of our country with the global economies, they could also look at the deductions/benefits provided by those countries (such as deductions for married couples, child in the US, personal allowance both in the US and UK, work-related expenses in Australia, etc.) for the salaried class. This would again help with increasing the disposable income in the hands of the individual.
The government has the option to look at income tax slabs suggested in the draft direct tax code when it was released for public discussion.
Having said that, reduction in personal income tax rate is the buzzword today and taxpayers have their eyes set on Finance Minister Nirmala Sitharaman's second Budget next month for some relief.
The author Sethuraman is Partner and Turakhia is Manager, with Deloitte Haskins and Sells LLPDisclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.