Income tax rates: FM Nirmala Sitharaman hints at cuts, but there is hardly any room

Finance minister Nirmala Sitharaman on Saturday hinted at a cut in personal income tax rates among several other steps to revive economic growth. The middle-class Indians have been demanding cuts in income tax rates ever since the Narendra Modi government cut corporate tax rates in September. With the Union Budget 2020 is less than two months away, the minister’s statement has raised the expectations of the people.

A committee led by former Central Board of Direct Taxes member Akhilesh Ranjan had submitted its report on revamping personal income tax rates, but its recommendations are not available in public domain. It is rumoured that the committee has recommended cuts in income tax rates and a revamp of the existing tax slabs.

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A cut in personal income tax may augur well for an economy that is struggling with a lack of demand. But going by the revenue and expenditure trends this financial year so far, the Narendra Modi government is left with no fiscal room to offer any tax concessions without hurting fiscal balance. Fiscal deficit stood at Rs 7.2 lakh crore in the April-October period, 102% of the Rs 7.03 lakh crore budgeted for the entire financial year.

Speaking at the HT Leadership Summit, the finance minister said the government will be guided by the glide path of the Fiscal Responsibility and Budget Management Act. Any tax cuts or additional expenditure to tackle slowdown would be impossible within the framework of the FRBM Act. There are calls from the industry and experts that the government should ignore the fiscal restrictions considering the slowdown in the economy.

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India is facing a severe economic slowdown due to slack demand and low private investment. The economy expanded 4.5% in the second quarter of the current financial year that followed a dismal 5% growth in the first quarter ended June. The Reserve Bank of India has cut the growth for the year to 5%, the lowest in more than 10 years.

The government had cut base corporate tax for existing companies to 22% from 30%. For manufacturing companies incorporated after October 2019, the tax rate was cut to 15% from 25%.