The government is unlikely to moderate personal income tax rates for the rich due to fiscal stress on account of lower tax realization 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 realization, 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 mobilization 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 realization 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, clamor for a reduction in personal income tax rates gained momentum. Even the panel on Direct Tax Code in its report favored moderation in personal income tax, simplification of procedure, and improving compliance with a view to raising 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 stabilized at around 55 percent last year.