- The Indian government just proposed modifying the tax slabs, allowing for full tax rebate on incomes up to ₹500,000.
- It’s a populist move in the interim-budget, also termed the ‘election budget’.
- The announcement could potentially prove to be controversial once the Direct Tax Code Report comes out on February 28.
The Indian government has announced relief for individual middle-class taxpayers extending the non-taxable slab upwards to ₹500,000.
"The benefit will be to only those taxpayers whose total income doesn’t exceed ₹500,000. The moment it exceeds ₹500,000, tax will start from ₹250,0000 at 5% up to ₹500,000 and 20% from ₹500,000 to ₹1 million," according to Ved Jain, former president of the Institute of Chartered Accountants of India.
Piyush Goyal, the interim finance minister who presented the budget, also clarified that even people will gross income of upto ₹650,000 may not be required pay any income tax if they make investments in provident funds, specified savings and insurance etc.
Goyal added that this move will allegedly provide tax benefit of ₹185 billion to an estimated 30 million Indian middle-class taxpayers.
Essentially, you won’t have to pay any tax if you have ₹7.5 million tucked away in fixed deposits and no other income because you'll only be earnings ₹450,000 a year assuming an interest rate of 6%.
It’s an apt populist move by the Modi government considering that they fell short on their promises of increasing employment from 2014 and demonetisation disrupted the economy.
Not the first time
In 2014 budget, the minimum tax exemption limit was raised from ₹200,000 to ₹250,000. Along with that, the limit under 80C was hiked by ₹50,000 to ₹150,000. - so essentially, individuals can reduce up to ₹150,000 from their total taxable income.
The new tax slabs
In its pre-budget memorandum, the Confederation of Indian Industry (CII) had suggested that the tax rate should be zero from income up to ₹500,000, while 10% tax should be levied on income upto ₹1 million and 20% on income up to ₹2 million and 25% on income beyond ₹2 million.
Cuts in income-tax rates have invariably resulted in higher revenues in the past, and there is no reason why they should not generate a similar response in the future.
India has generally been a non-compliant society, where avoiding and evading tax plague the economy. A tax cut is a temporary incentive for both since it drives down the incentive to avoid compliance.
Introducing new tax slabs also puts more money in hands of the taxpayers increasing consumption demand. The requirement for borrowing goes down which, ideally, results in interest rates going down.
The new tax slabs may have appeased the country but the Direct Tax Code Report is coming up on February 28 that could quickly turn the tables on the government.