Govt unlikely to go for personal income tax cut amid fiscal stress, lower tax realisation

New Delhi: The government is unlikely to moderate personal income tax rates for the rich due to fiscal stress on account of lower tax realisation amid a slowdown in the economy, sources said. The pressure is mounting on the government to cut personal income tax rates to boost demand, especially after the finance ministry reduced the corporate tax rate by up to 10 percentage points. According to sources, personal income tax rate cut is difficult at this juncture due to multiple factors like a slowdown in the economy, lower tax realisation and subdued non-tax mop up. The government last fiscal missed its direct tax collection target, and for this financial year it has set a higher revenue mobilisation goal of Rs 13.80 lakh crore.

The government needs higher revenue to spend on social security schemes like Ayushman Bharat, Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), PM-KISAN, and PM Awas Yojana, among others. These schemes require funding at a time when there is already pressure on indirect tax collection due to falling realisation from Goods and Services Tax (GST) and revenue implication of massive Rs 1.45 lakh crore due to the corporate tax cut last month. In the biggest reduction in 28 years, the government cut corporate tax rates by almost 10 percentage points as it looks to pull the economy out of a six-year low growth of 5 percent recorded during the first quarter of the current fiscal. Sources also said the government has already given several exemptions to taxpayers, including making an income of up to Rs 5 lakh exempt from tax. The government is gradually increasing spending social security and reducing the tax burden on lower-income earners, sources said. In order to collect more tax from the super-rich, the government in Budget 2019-20 enhanced the rate of surcharge on individuals with a taxable income of more than Rs 2 crore. This raised the maximum marginal rate to 39 percent for those earning between Rs 2 crore and Rs 5 crore, while for those with an annual income of over Rs 5 crore, the new maximum marginal rate was 42.74 percent. Soon after the corporate tax rate cut, clamour for a reduction in personal income tax rates gained momentum. Even the panel on Direct Tax Code in its report favoured moderation in personal income tax, simplification of procedure, and improving compliance with a view to raise revenue from the direct tax. The share of direct taxes to India’s total tax revenues peaked at 61 percent in 2009-10 and has since stabilised at around 55 percent last year. As a percentage of nominal GDP, tax revenues make up around 11 percent, within which the share of direct taxes has hovered around 5.5-6 percent of GDP in the past three-four years. Personal income tax collections amounted to Rs 4.7 lakh crore last year, or 2.5 percent of GDP. This year’s target for personal income tax is budgeted to rise by an ambitious 23 percent compared to a subdued 10 percent growth in 2018-19.