Should the budget give income tax exemption to boost consumption? While people such as former Chief Economic Advisor (CEA) Arvind Subramanian and former finance minister P Chidambaram argue against income tax rate cut to enhance consumption, a recent SBI report favours such a move saying that the income tax-paying individuals contribute a significant part to overall consumption.
The SBI report says: "The salaried class, which pays taxes, contributes a significant part to overall consumption. In FY19, their overall gross taxable income was estimated at Rs 46 lakh crore, 41 per cent of the overall private final consumption expenditure."
"We believe that in order to boost the consumption through increase in personal disposable income there is a need to change the tax rate in the Rs 5-10 lakh income category, more than in the Rs 10 lakh category. It says, a 5 per cent cut will impact around 3 crore taxpayers and cost Rs 75,000 crore to the exchequer," says the report.
It also argues that it might be a better idea to incentivise savings for the salaried class with the hike in Section 80-C limit that could generate at least five times more household savings into retirement corpus than revenue foregone by the government.
At present, one can claim income tax deduction up to Rs 1.5 lakh by investing/saving in specified tools prescribed by the government. The government estimates a revenue loss of Rs 75,000 crore due to Section 80-C exemptions in 2018-19, up from a revenue loss of Rs 65,000 crore in 2017-18.
There are more arguments in favour of changing the tax slabs. Archit Gupta, founder and CEO, ClearTax, says that although tax rates have been tinkered with in the past, taxing income in excess of Rs 10 lakh at 30 per cent is excessive. He also says that there is no 10 per cent slab, which needs a thorough review.
The SBI report also bats for exemption of interest income from senior citizens term deposits. It says: "There are around 41 million senior citizens term deposits accounts in the country with total deposit of Rs 14 lakh crore, or 7 per cent of India's GDP. The average deposits size per account is around Rs 3.3 lakh and interest income from such deposits forms 5.5 per cent of private final consumption expenditure in 2018-19. It is imperative that government exempts such interest income from taxes or increase the threshold limit."
Former chief economic advisor Arvind Subramanian has argued against income tax rate cut in one of his recent papers on the Indian economy. His rationale for opposing such a move is that it would only benefit a tiny miniscule of income tax payers.
He says: "Fiscal resources should not be devoted to favouring a small share of the population, who are by no means among the most deserving. In fact, structurally, India should be thinking of ways to bring more taxpayers into the income tax net. It should not be raising exemption limits, as was done unfortunately in the 2019-20 budget."
According to the Income-Tax department, there are around 8 crore individual taxpayers in the assessment year 2018-19.
However, the biggest impediment to any income tax exemption is subdued collection of not just income tax but overall direct taxes.
The government expects to collect Rs 5.7 lakh crore from income tax against Rs 4.75 lakh crore collected in the previous financial year, an estimated jump of 23 per cent. But in the current financial year, the total income tax collection has been Rs 2.78 lakh crore until November 2019 compared to Rs 2.6 lakh crore in the previous financial year, registering a year-on-year growth of 6.75 per cent.