The Finance Ministry is likely to provide income tax relief to the middle class in the upcoming Union Budget 2020-21, according to two senior government officials.
A series of discussions have been held within the government to promote economic growth and a reduction in the tax burden is seen as having a direct impact on boosting consumption.
An official said the Finance Ministry is learnt to have firmed up plans under which the tax adjustment is likely to be planned in a manner that the effective tax burden of the middle class effectively comes down by about 10 per cent of their overall tax outgo for the year.
What this could mean is that the tax structure may be tweaked in a manner that if tax outgo for an individual is Rs 1 lakh in a year, then the person may see an effective reduction in his tax outgo by around Rs 10,000.
“We are going through a number of suggestions. One view is to remove all surcharges on middle class and to keep the income tax structure simple. Some tax relief is being thought of, either in the form of an adjustment of tax slabs or the removal of the surcharges,” one of the officials said, asking not to be named.
In another possible move, the government is learnt to be considering tax incentives to individuals for buying home. An official said that since real estate is a key sector and has the biggest multiplier effect on the economy, there could be benefits targeted for new home buyers.
“Discussions are underway on possible measures and an increase in tax incentive for new home purchase could be provided to push home purchase and absorption of unsold inventory,” the official said.
While taxpayers are hoping for relief in the budget, the government will have to balance its fiscal position in the wake of lower-than-projected overall tax collections.
When the government had announced cut in corporate tax rate last year, many argued for a cut in income tax rate for individuals in a bid to leave more at the hands of consumers at a time when the consumption in the economy has been slowing down.
The CEO of a brokerage firm said that that a cut in corporate tax rate would not help push investments at a time when the capacity utilisations remain low.
“Only when the consumption in the economy rises and capacity utilisations grow, will companies be willing to go for expansion and fresh investments. And in a bid to push consumption, some relief should be provided to individual tax payers in the forthcoming Budget,” he said.
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On the direct tax front, the government has already announced a sharp cut in corporate tax rate from 30 per cent to 22 per cent (excluding cess and surcharge) in September 2019 to promote investment activity in the economy. Even on the indirect taxes front, the GST rates have been reduced on the multiple occasions.
The government has pegged its tax collections to drop by Rs 1.45 lakh crore annually as a result of cut in corporate tax rates in the short term. Over a period, rising economic growth through higher investment activity is expected to compensate for the tax shortfall.