Tax Cut Expectations for Budget 2020

Expected Budget 2020 Updates - Big Tax Cuts for Middle Class is on The Cards?

30 Jan 2020
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Every January, as soon as new year celebrations die down, budget-related discussions heat up. Rumors and leaks related to various budget proposals and schemes fly hard and fast. But potential changes in the income tax slab rates are, without a doubt, the most popular topic of discussion. A large number of salaried and self-employed people look forward to a reduction in the income tax slab rates. Even though it is not possible for the government to reduce the tax burden every year, speculations are rife that the Union Budget 2020 may bring tax cheer for the middle class.

Rationale for tax cuts

The Indian economy is passing through an acute slow down with the GDP growth rate falling to a six-year low of 4.5% in the second quarter of 2019-20. Several financial institutions have predicted the economy to grow in the range of 4.9%-5.1% in the current financial year. More worryingly, consumption growth slowed down to 3.1% and 5.1% in the first and second quarters of the fiscal year, respectively. India is a consumption-driven economy with around 60% of the GDP determined by consumption. The government urgently needs to stimulate demand in the economy and a reduction in income tax could do that. New income tax slabs with a lower tax on the middle class can raise disposable income and boost consumption.

There is also a case for reduction in income tax as the government has already cut corporate tax rates to uplift private investment. The Indian economy is driven by four engines of government spending, private investment, consumption and exports. Government spending has been growing in double digits for the last three years. In a surprise move, the tax rate for existing companies was brought down to 25% and for new companies to 15% by the government in September. Corporate tax cuts were aimed at private investments and the government is likely to target private consumption now, with lower income tax slab rates.

Expected changes

The government had constituted a tax force in 2017 to suggest changes to the existing income tax laws. The task force submitted its report in August 2019 with the recommendation to formulate a new income tax slab with five categories instead of the current three. The report has not been made public but the government is likely to accept parts of the report. From the current income tax rates of 5%, 20% and 30%, tax slabs 2020 may have four rates of 10%, 20%, 30% and 35%. People earning between Rs 2.5 lakh and Rs. 10 lakh may be taxed at 10%. People earning between Rs. 5 Lakhs and Rs. 10 Lakh annually are likely to be the biggest beneficiaries of the move as their tax burden will come down to 10% from 20% currently.

Expected Income Tax Slabs for Budget 2020

Source: Indiatoday.in

People with an annual income of Rs. 2.5 Lakhs-Rs. 5 Lakhs need not worry as the rebate announced in interim budget 2019 is likely to be left untouched. It reduces the effective tax liability of people earning less than Rs. 5 Lakhs to zero. As per some reports, the government could also increase the rebate to include people earning up to Rs 6.5 lakh a year. Income tax slab 2020 is expected to have a tax of 20% on income between Rs. 10 Lakhs and Rs. 20 Lakhs and 30% on Rs 20 Lakhs to Rs 2 Crores. People earning between Rs. 10 Lakhs to Rs. 20 Lakhs will see their income tax liability come down to 20% from 30%. An annual income of over Rs. 2 Crore is likely to be taxed at 35% under tax slab 2020. With likely tax relief to people earning between Rs. 5 Lakhs and Rs. 20 Lakhs, the government will be targeting the middle and upper-middle class as they have higher consumption power.

Conclusion

Along with the new income tax slab rates, the budget may rationalize tax deductions and allowances. Specific allowances may be reduced, and the government may increase the standard deduction from salary to Rs 60,000 from Rs. 50,000 currently. The proposed tax cuts may also turn out to be just speculations as the government has limited fiscal scope for tax reliefs. With a shortfall in tax revenues, the government may choose to leave income tax slabs unchanged. Whatever be the outcome, the middle class will anxiously wait for the finance minister to announce the Union Budget 2020 on February 1.

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