Post demonetisation, India faced acute cash crunch due to which demand went crashing. The consumption reduced due to note ban and now the government is looking to revive it.The Prime Minister Narendra Modi may spur demand by slashing taxes in Budget 2017. This may hurt its short-term revenue spurt, which his administration had been touting as proof of success of the currency policy change.
"Economic growth is unlikely to accelerate in the near term on its own so the situation for the government is such that in order to improve their own credibility, the government will have to improve demand for goods and services. So the personal income tax slabs or rate may be reduced in the budget to give higher purchasing power to consumers," Nihal Kothari, executive director at tax firm Khaitan and Co. in Mumbai, told Bloomberg.
Coming to indirect taxes, net revenue from customs, excise and service taxes climbed up 25% in April-December from a year earlier, meeting 81% of the government's budgeted target for the year through March 31.
"The government may be forced to roll back some of the excise increases on fuel as this could feed into inflation. So additional tax revenues will come from greater compliance as we near the GST regime and the threat of scrutiny rather than economic growth," Kothari told Bloomberg.
For instance, net indirect tax collection through November 2016 grew 26.2% due to higher tax rates and other special measures and just 8% after you strip out these effects Service tax numbers too are flattered by an increase in the rate to about 15 percent last year from 12.4% in April 2015.
In direct taxes, net revenue from corporation and income taxes rose 15.1% April-November from a year earlier, helping meet about 49% of the government's budget goal. Collections rose to 65% of the target in December, the government said Jan. 9.
Tax breaks may be offered to those who invest in funds that contribute to building crucial roads, ports and highways. Lowering the personal income tax rate would boost compliance and since less than 1 percent of the population pays this tax, revenue losses would be limited, according to Kotak Securities Ltd., which calls for a cut.