The clock is ticking. Govt needs to walk the talk on personal taxes

Amarpal S Chadha

The cut in corporate tax rates is a step towards making India an attractive investment destination. The reduction stoked expectations that there may be some relief on the personal tax front as well. Any such cut will result in increased cash flow among consumers, which in turn would spur demand -- at least in the short term.

The finance minister recently said the government is working on several measures to revive the economy and one among those is rationalisation of personal income tax rates.

All said, there are varying views on the interplay between lower personal tax rates and economic growth. Put two plus two together, that should increase consumer spending and boost growth. But it may not work exactly the same way as expected. Consumers, in turn, may decide to save more rather than spend, given the cautious state of affairs.

Increased savings are not all that bad, which may lead to greater investment, output, employment and economic growth.

The government can consider bringing in some changes in the personal tax regime to accelerate consumer demand and spur growth.

At present, the basic exemption limit is Rs 2.5 lakh per annum and income between Rs 2.5 lakh and Rs 5 lakh is taxed at 5 per cent. Those in the income bracket of Rs 5-10 lakh are taxed at 20 per cent and those above Rs 10 lakh are taxed at 30 per cent rate. Further, surcharge is levied from taxpayers with an income of more than Rs 50 lakh. Accordingly, the maximum marginal rate of tax varies from 34.32 per cent to 42.74 per cent for income ranging from above Rs 50 lakh to Rs 5 crore and above.

The government could consider some favourable tweak in either the slab or the rate of income tax, which will help increase the net take home salary.

The 2019 Budget had introduced additional deduction of Rs 1.5 lakh for interest on loan for purchase of first residential property (subject to satisfaction of certain conditions). Given the current market situation, the government could consider extending this benefit to the second home buyers as well. Further, carving out the deduction for housing loan principal repayment from Section 80C and allowing it under a separate section is another option that could be considered.

Increasing the ceiling limit of deduction for interest on housing loan from the existing Rs 2 lakh to Rs 3 lakh will lead to additional investment in the real estate sector.

In addition, the government could increase deduction under Section 80C to Rs 2 lakh from the existing limit of Rs 1.5 lakh. This would provide more saving avenues for individual taxpayers.

There are other factors that play an influential role in the growth dynamics, namely global developments, NBFC liquidity squeeze, slump in real estate and automotive sectors, shift in the savings pattern of the workforce and the like. Let’s hope that measures taken by the government so far will bring back the economy to a position where we all want it to be.

Amarpal S Chadha is Tax Partner & India Mobility Leader, EY. Shanmuga Prasad, senior tax professional with EY, has also contributed to this article. Views are personal.