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Sitharaman has her task cut out as what India wants next becomes clear

An ET Online survey has found out what people want next after last month's corporate tax cut.

ET Online|
Updated: Oct 25, 2019, 08.58 PM IST
Tax cut
The corporate tax cut already means likely revenue loss of about Rs 1.45 lakh crore. BofA-ML says that if the Ranjan panel recommendations are accepted, that would cost the exchequer Rs 1,75,000 crore more.
Looks like middle India is not yet satisfied with what Nirmala Sitharaman has done so far for the economy by way of her big-bang measures — the common taxpayer is still looking forward to what s/he thinks is the biggest sop the FM could offer.

An ET Online survey, carried out to capture the general mood of the nation ahead of Diwali, found that India wants Sitharaman to follow up on last month's corporate tax cut with a similar measure of possibly even more profound significance: A cut in income tax for the individual taxpayer.

An economy in a slowdown necessitates a wide range of countermeasures that include higher investment, better ease of business, manufacturing/infra/agri boost and revamp of old land & labour codes. The more quick-impact ones may include bringing the banking system back on track and quickening the pace of job creation.

The main pillars of GDP growth are stuck in multi-year lows even as the country's job crisis had only gone from bad to worse — a situation that calls for multiple urgent measures, probably all of the above.

In such a scenario, that a majority of India's most discerning business readership still wants an income tax cut first, speaks volumes in itself.

The case for a cut
At the moment, weak private consumption is accentuating the impact of a business downcycle and falling consumer sentiment, giving rise to fears that the economy could likely get worse before it gets better.

Nowhere is this more pronounced than in FMCG, where overall growth has fallen to 7.3% in Q3 of 2019 from a high 16.2%. The tale of rural FMGC is even more sordid. According to Nielsen, the decline in rural market growth — to 5% in Q3 of 2019 from 20% in the corresponding quarter last year — has accounted for 60% of the total FMCG fall.

On top of that, the deep stress in real estate and auto sector is said to have added to unemployment, impacting disposable incomes.

Multiple rate cuts by the RBI have failed to improve the general liquidity situation because banks have yet to transmit these rate reductions to the common borrower.

If Nirmala Sitharaman goes for a personal income tax cut, it could positively impact the situation at several levels. Apart from being an obvious boost to disposable incomes, a tax cut will — more importantly — go a long way in reviving sentiment, which is one of the biggest intangibles that can help an economy emerge from the doldrums.

Likelihood of a cut
Businesses in the country had their Diwali come early when Modi government announced a sizeable cut in corporate taxes last month, bringing India on par in tax matters with most of its emerging market peers.

Following this big-bang move, speculations have gained ground that the government may also introduce a gamechanger in the personal income tax sphere as well.

And there is expert's backing for such a move, too. "There is a strong case for a similar reform of personal income tax," says former Niti Aayog Chairman Arvind Panagariya.

The Akhilesh Ranjan taskforce, tasked with suggesting an overhaul for the I-T Act, has already recommended major changes in personal income tax slabs, according to media reports. The suggestions, however, have yet to be made public.

How life could look like if the rejig is done
The basic exemption level has been kept by the taskforce at Rs 2.5 lakh for general taxpayers, various reports have said. The basic exemption stays at Rs 3 lakh for citizens above 60 years of age. For very senior citizens (above 80 years), the exemption limit has been retained at Rs 5 lakh.

A widening of the slabs is the biggest change suggested by the taskforce. The exercise possibly includes such rejigs as:

a) The 10% tax slab has been widened to cover incomes up to Rs 10 lakh. As per CBDT data, over 27% (1.47 crore) of the country's individual taxpayers (5.52 crore in total) who filed returns for 2017-18 had incomes ranging from Rs 5 lakh to Rs 10 lakh. If the new suggestions are accepted, these taxpayers would come to fall in the 10% slab instead of the earlier 20% one — a huge relief.

b) Those with incomes between Rs 10 lakh and Rs 20 lakh would fall under the 20% slab.

c) 30% slab has been suggested for taxpayers with incomes ranging from Rs 20 lakh and Rs 2 crore.

d) For those with incomes above Rs 2 crore, the taskforce has suggested a slab of 35%.

Here's your primer to the current income tax slabs: i) 5% for Rs 5-10 lakh; ii) 20% for Rs 5-20 lakh; iii) 30% above Rs 20 lakh; iv) additional 10% surcharge above Rs 50 lakh; v) 15% surcharge above Rs 1 crore; vi) 25% surcharge above Rs 2 crore; and (vii) 37% surcharge above Rs 5 crore.

There is a 4% cess on total tax and full tax rebate for earnings up to Rs 5 lakh/year as of now. As per reports, the new direct tax code has suggested scrapping of the surcharges. But it has retained the tax rebate.

Can Modi govt afford it?
As reported by Bloomberg, these measures could be part of the coming budget, making FY21 the happiest of financial years for India's taxpayers. But before that, here's a look at how this math will work out for government finances.

The corporate tax cut already means likely revenue loss of about Rs 1.45 lakh crore. BofA-ML says that if the Ranjan panel recommendations are accepted, that would cost the exchequer Rs 1,75,000 crore more.

But can Modi government afford such levels of revenue foregone at such a precarious point? The next few weeks could provide some indications.
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