The Modi government may not moderate personal income tax rates for the rich, courtesy fiscal stress -- lower tax realisation amid the slowdown in the economy. This comes amid mounting pressure on the government to cut personal income tax rates to boost demand, more so after the Finance Ministry reduced the corporate tax rate by up to 10 percentage points.
The government task force on the Direct Tax Code (DTC), in its report on August 19 had recommended slashing of income tax rates under various categories to almost half.
According to a PTI report, personal income tax rate cut is difficult at this point in time with multiple factors -- slowdown in economy, lower tax realisation, subdued non-tax mop up -- posing as challenges in its way.
The government last fiscal missed its direct tax collection target, and for this financial year it has set a higher revenue mobilisation 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 realisation 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 per cent recorded during the first quarter of the current fiscal.
Sources also said the government has already given several exemptions to taxpayers, including making income of up to Rs 5 lakh exempt from tax.
The government is gradually increasing spending social security and reducing 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 taxable income of more than Rs 2 crore.
This raised the maximum marginal rate to 39 per cent for those earning between Rs 2 crore and Rs 5 crore, while for those with annual income of over Rs 5 crore, the new maximum marginal rate was 42.74 per cent.
Soon after the corporate tax rate cut, clamour for reduction in personal income tax rates gained momentum.
Even the panel on Direct Tax Code in its report favoured moderation in personal income tax, simplification of procedure, and improving compliance with a view to raise revenue from direct tax.
The share of direct taxes to India's total tax revenues peaked at 61 per cent in 2009-10 and has since stabilised at around 55 per cent last year.
As a percentage of nominal GDP, tax revenues make up around 11 per cent, within which the share of direct taxes has hovered around 5.5-6 per cent of GDP in the past three-four years.
Personal income tax collections amounted to Rs 4.7 lakh crore last year, or 2.5 per cent of GDP. This year's target for personal income tax is budgeted to rise by an ambitious 23 per cent compared to a subdued 10 per cent growth in 2018-19.
What did the Task Force on Direct Taxes recommend:
- The task force report on income tax recommended a major overhaul in personal income taxes
- The task force recommended reducing the tax percentage for people falling under Rs 5-Rs 10 lakh income group to 10% from the existing 20%.
- The task force also recommended reducing the tax liability of those falling under Rs 10 lakh to Rs 20 lakh income category to 20% from the existing 30%.