Income tax cuts in Budget: A half-hearted recipe to fix India’s consumption woes

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₹5 lakh in the preceding year, and another 36% (or 24.1 million) fell under the ₹5-10 lakh range. That makes individuals with gross income of less than ₹10 lakh per year the most dominant tax base for the government.

That’s the segment that could be targeted when the government plans any tweaks to tax rates with an eye on providing relief. This could mainly come through raising the tax exemption limit to help boost the consumption of this base, economists said.

Currently, the exemption—the provision of having no income tax liability—applies to a taxable income up to ₹2.5 lakh under the old tax regime and up to ₹3 lakh under the new tax regime. Rebates are also given for taxable incomes up to ₹5 lakh and ₹7 lakh, respectively.

(Taxable income is what tax payable is calculated on by adjusting gross income for applicable exemptions.) Also Read: The spoilers that lie ahead: What ails India’s rosy growth story The bigger problem, however, is that India’s income tax base as a share of its population remains tiny, and the benefit of the cuts will only reach a small section as opposed to the far more widespread rejuvenation of consumption that India needs, particularly in rural areas. “Only around 4% of the Indian population pay direct taxes," said Lekha Chakraborty, professor at National Institute of Public Finance and Policy (NIPFP).

“So tax cuts to increase consumption and aggregate demand would have partial effects only. In case the government is focusing on an income tax cut, they should raise the exemption limit of the lowest tax slabs." Given the low impact that income tax benefits will have, a better approach likely lies outside the realm of the Budget: reduce the burden of GST instead, since the indirect tax is levied