Union Budget 2024: Middle class unlikely to get income tax relief?
Union Budget 2024: Middle class unlikely to get income tax relief?
Despite calls for relief amidst inflation, the upcoming budget may not deliver the desired tax benefits.
India’s middle class calling for a tax cut in a highly inflationary environment has increased their voice once again. This time, it’s not just the common man but also India Inc. calling for some tax relief at the individual level. Prominent industry representatives have suggested that income tax relief for those in the lowest slab may need to be considered by Finance Minister Nirmala Sitharaman on July 23, when she announces the full Budget for this financial year.
A relief in income tax rates could help boost India’s slacking consumption levels, which could in turn boost companies’ profit levels and eventually the overall economy. Expectations of a tax slab rejig also received a boost following the BJP’s lesser-than-expected seat win in the general elections and the upcoming Assembly elections in key states like Maharashtra.
The general consensus among taxpayers remains that apart from a blanket cut in tax rates, the exemption level in Section 80C should go up, given the inflation rates in India. While the existing tax regime has been left undisturbed, the Centre announced a brand-new tax structure in 2020 wherein the calculations were simplified, and most exemptions were eliminated. In 2021, there were no income tax reliefs, and the story remained the same in 2022.
In 2023, the government made the new income tax regime the default option, with the basic exemption limit hiked to Rs 3 lakh from Rs 2.5 lakh, and the slabs in the new regime were shuffled. In this regime, as it stands, there is no tax on those earning up to Rs 3 lakh. Income above Rs 3 lakh and up to Rs 5 lakh will be taxed at 5 per cent with rebate eligibility. For income above Rs 6 lakh and up to Rs 9 lakh, the income tax is applicable at a 10 per cent rate. For income above Rs 12 lakh and up to Rs 15 lakh, income is taxed at a 20 per cent rate. For those with taxable income above Rs 15 lakh, a 30 per cent income tax rate is applicable.
News reports have suggested that the Finance Ministry, in its stakeholder meetings, mulled tax measures like cutting rates or adding a new slab as it seeks to push consumption, with a specific focus on India’s lower-income individuals. Officials have likely discussed making changes to the new tax regime announced in 2020, wherein income up to Rs 15 lakh is taxed at 5-20 per cent while earnings over Rs 15 lakh are taxed at 30 per cent.
However, economists feel the government may not be inclined to give tax benefits at this stage, given its focus on fiscal prudence. “The central government is likely to stick to its path of fiscal consolidation in the upcoming Budget. Murmurs of tax sops have gathered pace, given the Bharatiya Janata Party’s below-expectations performance in the 2024 Lok Sabha elections and the upcoming Assembly Elections in some key states,” said an economist.
“We do not expect any big sops in the Budget. There might be targeted policies addressing sector-specific stress, especially on the rural side. State governments are more likely to come up with policies which could be deemed populist in the run-up to the elections,” added another expert.
One argument behind seeking a tax rate cut is that it could spur India’s lagging consumption by putting more money in the hands of the average taxpayers. However, this argument may be flawed. “The rationale that lower taxes would spur consumption might be flawed. This is because the slack in consumption demand in India is largely led by the rural sector. Indicators for urban demand continue to show steady progress, and providing tax incentives which will majorly accrue to organized sector workers is unlikely to have the desired outcome on consumption,” experts explained.
Economists have pointed out that tax collection remains a priority for the Narendra Modi government, necessary to fund India’s various schemes. “To finance the infrastructure requirement of a developing country like India, the government needs to have a strong and stable tax base. Since coming into power, the government has focused on reducing tax leakages from the system by bringing in timely tax reforms,” added experts.
Analysts expect the Centre to continue its focus on capital expenditure in this Budget, which could eventually benefit India’s middle class. “If previous budgets are any indicator, the government is more focused towards infrastructure developments. The schemes could further be in the direction of taking India to the podium among world economies, which in turn would benefit the common man,” an analyst noted.
In a positive development earlier this fiscal year, the Reserve Bank of India transferred a surplus of Rs 2.11 lakh crore to the Centre as a dividend. Economists opined that this gives the government enough cushion to mull welfare spending while maintaining its focus on fiscal prudence. The Centre aims to bring down India’s fiscal deficit, the gap between the government’s incomes and receipts, to 5.1 per cent of GDP in FY25 and 4.5 per cent in FY26.
