The last Union Budget did not give relief to the middle class
New Delhi:
Will salaried people in India get some respite on income tax? That’s the million-dollar question before every Union Budget.
The last Union Budget did not give relief to the middle class as the government did not announce any change in tax slab or new deductions.
In the run-up to this year’s Budget, there is a strong buzz that the government may put more disposable income in the hands of the middle class by providing significant relief on income tax.
“With increasing costs of living and rising interest rates on loans, a relaxation in the income tax rates would help restore the purchasing power of individuals,” hopes Alpa Shah, a social entrepreneur and finance professional from Mumbai. She adds that the Budget must increase the standard deduction limit from Rs 50,000 to Rs 1 lakh.
If this expectation comes true, it will be a major relief for individuals, who have not seen a change in tax rate since 2017-18 and no change in the tax slab since July 2014.
Even KPMG and Deloitte – two of the Big Four accounting firms – expect tax relief measures.
“Considering strong tax collections in the current fiscal, there is an increased expectation that relief for individuals may be on the cards, including through an enhancement of the basic exemption limit to Rs five lakh,” KPMG wrote in its budget expectation report.
Currently, the basic income tax exemption limit is Rs 2.5 lakh.
“The highest tax rate of 30 per cent should be reduced to 25 per cent. The threshold limit for the highest tax rate should be increased from Rs 10 lakh to Rs 20 lakh,” a Deloitte India report read.
A reduction in income tax is also likely to make India more attractive as an investment destination and prevent the flight of capital abroad.
“The highest effective income tax rate in India, including surcharge and cess, stands at 42.744 per cent. This rate is much higher than that of Hong Kong (17 per cent), Singapore (22 per cent) and Malaysia (30 per cent),” argues Ms Shah.
Apart from buoyant tax collections and rising inflation, Anshul Gupta, Co-founder and CIO of Wint Wealth, says that politics may also influence the decision to cut taxes.
“This is the last full budget before the Lok Sabha elections next year. So, it makes sense for the government to give tax relief,” says Mr Gupta.
Noting that the 80C limit – expenditures and investments exempted from Income Tax – has remained unchanged since 2014, he adds that the Rs 1.5 lakh 80C limit in real terms is now around Rs 82,000.
According to the government, 5.8 crore people filed their income tax returns for 2021-22. This is just 4-5 per cent of the population. A significant chunk of the income tax is paid by people earning a monthly salary, who largely represents India’s middle-class population.
But a downturn in the global economy looms large and the government also needs to manage its fiscal deficit which is expected to 6.4 per cent in FY 2023. The government will need to do a fine balancing act of protecting the economy from potential shocks in 2023-24 and providing tax relief to salaried people.
“There is a good chance that the Union Budget will focus more towards schemes and subsidies that cover larger population which form the vote bank instead of salaried class,” says Mr Gupta, adding that a tax cut looks unlikely ahead of the 2024 Lok Sabha polls.
Taxpayers may have to keep waiting for any relief if the government chooses to prioritise heavy expenditure on public infrastructure in anticipation of a possible global slowdown.
“The government will need plenty of funds for such capital expenditure…The exchequer will put efforts into ramping up the revenue. I don’t see many possibilities for any remarkable reduction in the tax rate,” Naveen Wadhwa of Taxmann was quoted by Fortune India as saying.
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