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The government wants to address the middle class’s lower spending levels by stimulating consumption in order to contribute to the nation’s impressive GDP growth. Several government officials have stated that lowering specific personal income tax rates is one of the approaches being considered.

The Centre is looking to increase the income limit for individuals before any tax is levied to Rs 5 lakh from Rs 3 lakh currently in the upcoming budget likely to be presented mid-July, one of the officials said. This will be applicable only to those filing returns under the new tax regime and is aimed at leaving more disposable income in the hands of individuals, particularly those in the lower earning bracket.

Undoubtedly, a decision on this will be made in the near future when the budget is presented.

If the Centre proceeds with this action, individuals having incomes roughly between Rs 7.6 lakh and Rs 50 lakh may see a reduction in tax liability of Rs 10,400 (including a 4-percent Health & Education cess).

However, the benefit would be Rs 11,440 (including cess and a 10-percent surcharge) for those whose income is above Rs 50 lakh but less than Rs 1 crore, and the liability would be reduced by Rs 11,960 (including cess and a 15-percent surcharge) for those whose income is more than Rs 1 crore but less than Rs 2 crore.

And, finally, for those with incomes above Rs 2 crore, the benefit would be Rs 13,000 (including cess and a 25-percent surcharge).

“Increasing the basic tax exemption limit from to Rs 5 lakh under the new tax regime will be a good move by the government. It will result in a tax savings of at least Rs 10,000, for all individual taxpayers with income above Rs 5 lakh, except for those already receiving a tax rebate on income up to Rs 7 lakhs. This change will help increase personal disposable income, stimulating spending and investment which are essential catalysts for economic growth,” according to Sonu Iyer, Tax Partner, EY India.

Budget 2020 gave taxpayers the option to opt for a new system that offers uniformly reduced tax rates in exchange for giving up the majority of deductions and exemptions, or for the current framework with built-in options for a lower tax incidence via defined investments.

In the previous tax system, a taxpayer was eligible for exemptions such as leave travel allowance and dwelling rent allowance, in addition to deductions against investments under specific sections.

According to a second official, industry leaders’ request to lower the top individual income tax slab rate under the new tax regime from 30% to 25% is unlikely to be granted by the Centre.

“Changes in higher income tax slabs are unlikely because consumption boost is currently needed for lower-income people,” the official added.

Even if demands have been made to raise the amount that is subject to the highest income tax rate of 30 percent from Rs 10 lakh to Rs 20 lakh, the government may not change rates under the previous tax regime. This is to make sure that more people are encouraged to switch to the new system, which disfavours refunds and exemptions.

In the new tax regime, individuals earning above Rs 15 lakh annually are placed in the highest 30-percent tax band; in the previous tax regime, the highest slab applied to incomes exceeding Rs 10 lakh.

According to a third official, the Centre is prioritising possibly lower personal income tax rates above drastically raising expenditures on subsidies and other programmes that are prone to waste.

“Tax rate cuts are a better way to boost consumption in the economy rather than splurging on welfare schemes given that such programmes are impacted by leakages to an extent, thereby leading to a situation where the benefit of the scheme sometimes fails to entirely reach those who need it the most,” this official added.

Since the nation is struggling with reduced levels of private consumption growth of about 4%—a 20-year low outside of the pandemic year—the subject of measures to support consumption has come up. This is in spite of FY24’s globally record-breaking GDP growth rate of 8.2 percent.

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