In a strategic move to address the issue of declining consumption, Indian government policymakers are leaning towards rationalising the existing income tax structure, particularly for lower income levels. This initiative aims to increase disposable income, thereby stimulating higher consumption and economic activity.
According to media reports, the government is prioritising tax rate cuts for lower-income earners over implementing additional welfare spending or freebies, emphasising the importance of fiscal consolidation. Officials believe that reducing tax rates could be a more effective measure to enhance disposable income, ultimately leading to a boost in consumption.
A senior official explained that boosting consumption is crucial for reviving demand, which is essential for restarting the investment cycle and encouraging private capital expenditure, especially in consumer-focused sectors. This increase in consumption could also positively impact GST collections.
"This way, tax rationalisation will unlock consumption," the official said. "Greater disposable income means greater consumption, more economic activities, and higher GST collections. This would potentially activate more direct and indirect revenue collection, including higher direct tax collection for corporations as they report increased income."
Discussions have highlighted the steep rise in marginal income tax rates within the current structure. "In the new tax system, the first slab of 5 per cent starts at Rs 3 lakh. By the time income reaches Rs 15 lakh, the marginal tax rate jumps to 30 per cent, a six-fold increase," an official noted. "This steep increase, while income rises five times, is significant."
Officials acknowledge the potential revenue loss from these tax cuts but stress the importance of a dynamic analysis to assess the net effect. "Since the measure is expected to spur demand, a general equilibrium analysis is necessary," an official stated. "More money in the hands of people leads to better consumption and increased direct and indirect tax revenues. Despite potential revenue losses, the overall net effect is expected to be positive."
As the Indian economy continues to face challenges, the government’s consideration of income tax rate cuts reflects a strategic approach to stimulate consumption and private investment. By increasing disposable income, policymakers aim to rejuvenate economic activities, thereby fostering a more robust economic environment.
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