Opinion Will a tax cut boost consumption and investment?

In a few weeks from now, Finance Minister Nirmala Sitharaman will unveil the Union budget for 2024-25. The budget, the first of the newly sworn in government, will be presented against the backdrop of a continuing slump in household consumption and subdued private sector investments. In what could be an acknowledgement of the extent of this demand slump and the need for policy intervention, officials in the government are reportedly exploring the possibility of rationalising the tax structure, tinkering specifically with the tax rates for lower income segments. There is an expectation that such a proposal would help boost household consumption, thereby pushing private capex in consumer focused sectors, providing a fillip to economic activity. But, alongside such measures, there is also a need for a more comprehensive review of the tax systems in the country.

Examining the existing capital gains tax regime would be one such imperative. Considering that currently the tax rates and the holding periods vary across asset classes, bringing about some alignment could be explored. Then there is the issue of GST rate rationalisation which, unlike changes in particular income tax slabs, affects a wider segment of the population. In its 45th meeting, the GST Council had decided to form a Group of Ministers to look into this issue. One possible option could be to merge some tax slabs. There is also the matter of bringing items such as petroleum products within the ambit of GST. However, any movement on these would require getting the state governments on board. The central government must negotiate with states, ease their anxieties, and push through the necessary measures — the next meeting of the GST Council is scheduled for June 22, only a few weeks before the presentation of the Union budget.

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Over the years, the government has taken various steps to increase the tax base, reduce the tax burden, and ease compliance. On the direct tax side, the number of taxpayers (individuals, companies etc) has gone up from 5.26 crore in assessment year 2013-14 to 9.37 crore in assessment year 2022-23, with individual taxpayers increasing from 4.95 crore to 8.9 crore over the same period. On the indirect tax side, there were 1.4 crore active GST taxpayers as on June 30, 2023. In comparison, in June 2018, registrations had stood at 1.12 crore. In 2019, the government had lowered the corporate tax rate to 22 per cent, and in the budget 2020-21, it had introduced a new and simplified income tax regime for individuals who forgo deductions and exemptions. More recently, in the interim budget 2024-25, the finance minister had proposed to withdraw “petty, non-verified, non-reconciled or disputed direct tax demands” up to specified limits, benefiting around one crore tax payers. These are steps in the right direction. The new government must continue on this path.