India is on the cusp of potential tax rate cuts in a bid to bolster consumption and drive economic growth in the country. The Indian government, led by Prime Minister Narendra Modi, is considering lowering personal tax rates for specific categories of individuals, aiming to provide relief to those earning over 1.5 million rupees annually. This move comes as the government seeks to address concerns related to inflation, unemployment, and declining incomes as highlighted by post-poll surveys. While the Indian economy exhibited robust growth of 8.2% in 2023-24, consumption levels have not matched the same pace.
The proposed tax cuts could be unveiled in the upcoming budget presentation scheduled for July, marking a significant step in Prime Minister Modi’s administration focus on enhancing the quality of life for the middle class and boosting their savings. By reducing personal tax rates, the government aims to stimulate consumption and increase savings among middle-class households, ultimately driving economic activity.
According to government sources, the adjustments in the tax structure might include modifications to the existing tax scheme introduced in 2020. Under the current system, annual income up to 1.5 million rupees is taxed between 5% to 20%, while earnings exceeding this threshold face a tax rate of 30%. The substantial increase in the tax rate when income rises from 300,000 to 1.5 million rupees has been deemed steep, prompting discussions on revising the tax brackets.
Moreover, the government is contemplating further reductions in personal tax rates for individuals with annual incomes of 1 million rupees, establishing new thresholds for income taxed at the highest rate of 30%. Despite concerns about potential revenue loss from tax cuts, officials believe that increased consumption resulting from the tax relief could offset the decrease in tax income.
The fiscal deficit target of 5.1% of GDP for the financial year ending March 2025 remains a priority for the federal government. With strong tax collections and favorable economic conditions, the government has the flexibility to plan the budget effectively. The upcoming budget announcement holds significance for India’s economic landscape, as tax reforms are poised to play a pivotal role in driving consumption, spurring economic growth, and revitalizing demand in the wake of sluggish consumption trends.
