Font size:
Print
Revamping Taxation: Implications for Growth and Consumption
Context:
As India gears up for accelerated economic growth, the revival of demand is set to take center stage.
More on News
- In an effort to stimulate private investment and urban consumption, Finance Minister Nirmala Sitharaman has announced significant tax relief for individuals earning below Rs 12 lakh per annum.
- Under the revised tax regime, these taxpayers will now be exempt from paying income tax, while those earning higher incomes will benefit from lower tax rates.
- This strategic move raises crucial questions about its broader fiscal and economic implications.
Assessing the Impact on Taxpayers
- According to tax data, the median gross total income for individual tax filers ranges between Rs 5 and 5.5 lakh.
- However, only 6.68 percent of India’s population filed income tax returns in FY 2023-24, indicating that the tax base is not fully representative of the overall income distribution.
- The exemption of incomes below Rs 12 lakh will directly impact at least 83.52 percent of individual taxpayers.
- Simultaneously, higher-income earners will also experience substantial reductions in their tax liabilities.
- For instance, an individual earning Rs 25 lakh annually could see their tax burden reduced by more than a third.
- The widespread nature of these cuts makes their economic consequences worth monitoring closely.
Stimulating Middle-Class Consumption
- Size of Middle Class: Determining the actual size of India’s middle class remains a challenge, with consumption patterns often serving as a proxy.
- Two key questions emerge:
- Did the tax cut effectively target the middle class segment that needed relief?
- Will it translate into increased consumption of goods and services?
- Increased Spending: Data suggests that median monthly consumption expenditure stands at Rs 6,334 in urban areas and Rs 3,866 in rural regions.
- The tax breaks could lead to increased spending, potentially boosting demand and creating employment opportunities.
- Only Short-Term Impacts: However, past experiences with corporate tax cuts reveal that while they had short-term effects, their impact did not persist beyond a single fiscal year.
- Uncertainty: From a fiscal standpoint, the tax cut is estimated to cost Rs 1 lakh crore.
- If it successfully stimulates demand, it could enhance future revenue inflows.
- However, the overall income and consumption distribution will influence whether this anticipated “multiplier” effect materialises.
- Some experts argue that reforming indirect taxes may offer a more effective way to boost consumption than personal income tax reductions.
Facilitating Business and Tax Compliance
- Ease of Business: Beyond personal taxation, the government remains committed to improving the ease of doing business for large corporations.
- A crucial aspect of this effort involves simplifying dispute prevention and resolution mechanisms.
- One of the most contested areas in direct taxation is transfer pricing—the complex process of ensuring that transactions between related entities are priced fairly.
- To reduce administrative burdens, the government has proposed a “block audit” system, which would standardise assessments for two years, improving compliance efficiency.
- Rationalisation: Additionally, the rationalisation of Tax Deducted at Source (TDS) thresholds and streamlining capital gains tax calculations demonstrate the government’s intent to enhance compliance and ease of tax filing.
- These measures align with broader efforts to build a more taxpayer-friendly regulatory environment.
- The latest budget signals a shift towards increased trust in taxpayers, with the Finance Minister indicating that the new Income Tax Act would be significantly shorter and devoid of penal provisions.
