Why is it important for the FM to cut income tax slabs, offer tax breaks?

Why is it important for the FM to cut income tax slabs, offer tax breaks?
With corporate tax cuts becoming a reality in September 2019 and the ongoing economic slowdown, expectations of a cut in personal taxes has virtually become the theme ahead of Budget 2020. It is not clear how the tax theme would play out in the budget but the expectations are manifold. It is expected that incomes up to Rs5 lakhs may be made fully exempt. It is also expected that the budget may cut income tax rates to just 5% up to taxable income of Rs8 lakhs. In addition, the upper middle income groups earning up to Rs20 lakhs is also expecting marginal relief. Finally, there are also expectations that the budget may expand the list of exemptions for individual tax payers. Why is it essential for the budget to address all, or at least most, demands?

Need to give slab exemptions
The current system of offering a rebate of Rs12,500 in the case of income up to Rs5 lakh is too convoluted. It applies only to incomes up to Rs5 lakhs and is inapplicable if the income crosses Rs5 lakhs. These can be simplified by converting the rebate into an exemption. That will allow everyone to pay zero tax up to Rs5 lakh incomes. This would be effectively higher considering the flat standard deduction and other exemptions offered. This would be a great relief to the entry level consumers. Many of them have forced savings like PF which tend to put limits on consumption. Giving a tax break will ensure that household budgets do not get impacted. More so, considering that retail inflation has shot up to 7.35%.

The upper middle income group needs some relief
According to a report by the Boston Consulting Group (BCG), persons earning between Rs10 lakhs and Rs20 lakhs are the biggest contributors to incremental consumption. They are not just the consuming class but also the aspiring class and look to elevate their consumption quality to a higher level. This group has a much bigger impact on demand for a number of consumer goods and gets easy credit due to relatively higher income levels. If the government is looking to boost consumption and credit, then this is the group that needs relief. Of course, cutting taxes to 5% up to Rs8 lakhs income  would be a big relief, as would an across-the-board tax cut by 5%.

HRA exemptions need to be rationalized
For many people in the entry level income groups, owning a house continues to be a dream in larger cities. One relief the government can provide is to give HRA relief. Currently, there are two types of exemptions available. Firstly, HRA exemption is offered based on income levels provided the amount is paid as HRA as part of the salary package. Alternatively, where there is no HRA paid, the individual can claim exemption under Section 80GG up to a limit of Rs5,000 per month. This is unfair to most people who are paying higher rents. The government can look to offer 50% of the rent paid as flat exemption subject to a valid lease deed and production of stamped receipts. This will be a huge relief for the vast middle class.

Look to expand exemption list and limits
This is real food for thought. Some of the exemptions like Section 80C and Section 24 are designed to give tax exemptions to encourage people to invest and create long term assets. The Section 80C limit at Rs1.50 lakh is largely unrealistic since most middle income earners exhaust this limit via insurance premiums, PF contributions and tuition fees for children. There is a need to expand this limit to Rs3 lakhs and give a dedicated limit for equity funds and pension plans so that there is an incentive to start creating long term wealth.

The second major area of exemption that needs tweaking is interest on home loans, which is restricted to Rs2 lakhs per annum. To make more realistic, either the limit can be enhanced to Rs3.50 lakhs or the special time-bound exemption can also be extended to all new homes (not just low-cost homes). This will boost the demand for homes and have a catalytic effect on demand for a plethora of related products.

In an economic slowdown, there is no better antidote than encouraging consumption. Breaks in personal taxation can be a good starting point.

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