Centre may slash income tax rate to boost consumer demand

The income tax structure of the country has always remained one of the primary focal points when it comes to stimulating spending in the economy, and its effects on the country's citizens.

The current income tax regime has been a subject of debate, initiating discussions and drawing varying opinions on its impact on people belonging to various tax brackets. Now, a change in the income tax structure may be on the cards.

According to a report by The Indian Express, two government officials have said that given the emphasis on fiscal consolidation, tax rate reductions for individuals making less money are probably going to take priority over freebies or increase in spending on welfare. Therefore, a rationalisation of the existing income tax structure, including tax rate cuts, may be the way forward, as per government policymakers.

Keeping in mind that the declining consumption rate has been adversely affecting the Indian economy, the officials have opined that income tax deductions might be a more effective way to increase disposable income, which would give a boost to consumption, thereby stimulating the economy.

One of the officials mentioned that an increase in the consumption graph is thought to be essential for reviving diminishing demand in the economy, which, in turn, further bolsters investments — particularly when it comes to private capital spending in industries that cater to consumers. As a consequence, this will also increase GST collections.

Explaining the benefits of tax rationalisation, another official said, "This way, you will unlock consumption. There would be greater disposable income, means greater consumption, greater economic activities, more GST collection. So you may be actually activating more direct and indirect revenue collection. It would also mean more direct tax collection, also for corporations, because they would be having more income to report".

"Right now, in the new tax system, your first slab of 5 per cent starts at Rs 3 lakh. By the time it goes to Rs 15 lakh, which is five times, the marginal tax rate jumps from 5 per cent to 30 per cent - a six fold jump. So while income goes up five times, the marginal tax rate goes up six times, which is quite steep," the official further added.

The Budget for the 2024-25 fiscal is likely to be presented by the third week of July, putting to rest all speculations involving any possible income tax rate deductions.