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Jan 29, 2020 | Source: AxisDirect-O-Nomics
Taxes collected by the government play an important role in the development of the country. In 2018-19, the government had collected Rs 20.80 trillion as gross tax revenue. The total tax collection consists of direct taxes like income tax and indirect taxes like goods and services tax. While the changes in GST tax rates are decided by the GST council in its meetings, any changes to income tax rates are generally announced in the budget. During the Union Budget, the government provides a roadmap for its income and expenditure, the revenue it expects and the money it plans to spend on different projects.
Income tax is a major source of revenue for the government. Every earning individual, if he/she falls in taxable bracket has to pay income tax. Since the tax-paying middle class is an influential segment of society, there are calls for a reduction in income tax before every budget. The government, however, will have to walk a tightrope as income tax makes up for around 16% of the government’s total revenue.
The budget for the financial year 2020-21 is likely to be presented on 1st February, 2020, but let us first take a look at the announcements in the last budget.
Budget 2019
Two budgets were presented in 2019 due to general elections - Interim budget in February by the then Finance Minister Piyush Goyal and a final budget in July by the current Finance Minister Nirmala Sitharaman. The announcements in the final budget was a continuation of the interim budget. The personal income tax slabs were left untouched in the Budget 2019, but the surcharge on the income of the super-rich—people earning between Rs 2 crore and Rs 5 crore and above Rs 5 crore—was increased. The income tax rates for the middle class was left unchanged in the final budget, but relaxation was already provided in the interim budget. An annual income of up to Rs 5 lakhs was effectively made tax-free in the interim budget. Individuals with a net taxable income of Rs 5 lakh were given a tax rebate under Section 87A, which reduced their tax liability to zero. Besides the surcharge on the super-rich, there were no changes made to income tax rates in Budget 2019.
The rationale for tax cuts
The upcoming budget could be a little different from the last budget. There has been a demand for a reduction in income tax from several quarters. The growth rate of the GDP slumped to a six-year low of 4.5% in July-Sep from 7% a year ago. A slowdown in demand is being blamed for the continuous fall in growth rates. Consumption contributes around 62% to the Indian GDP growth and can single-handedly pull down or boost the economy. The weakening of consumer demand can be attributed to a variety of factors such as a credit crunch and low rural incomes. But rectifying the credit situation or boosting commodity prices is not entirely in the government’s control. The government on its part can try to increase the disposable income through a cut in income tax rates.
Will a cut materialize?
Even though the rationale behind an income tax rate cut is strong, will the government take the bait? If the finance minister’s public statements are taken into consideration, a rate cut could be coming. At a media event, the finance minister said that the income tax rate cut is one of the measures the government is considering for the budget. The government had recently announced a reduction in corporate tax rates, which has also fueled speculations of an income tax rate cut. However, the government may take a measured stand as there is a shortfall in budgeted revenue. GST collections have been below par and the government already lost potential revenue due to the reduction in corporate tax. The government may reduce income tax rates in the upcoming budget but may hike GST rates on certain mass-consumption items to boost revenues.
Conclusion
While a cut in personal income tax may not be a certainty, a reduction in tax liability could be, if you make smart investments. With us at Axis Direct, you can invest in tax-saving instruments like Equity-linked Savings Schemes (ELSS) and reduce your tax burden. You can save up to Rs. 1.5 lakhs in tax by investing in instruments like ELSS and effectively lighten your tax burden.
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