Trust in the Taxpayer

(Source – Indian Express, International Edition – Page No. – 12)

Topic : GS3 – Indian Economy

The article analyzes the impact of recent income tax cuts on demand revival, fiscal health, and economic growth in India.

Boosting Demand Through Tax Relief

As India aims for accelerated economic growth, reviving demand is a central focus.
To stimulate private investment and urban consumption, Finance Minister Nirmala Sitharaman announced a major income tax relief, exempting individuals earning up to ₹12 lakh from taxation.
This move not only reduces the tax burden on a significant section of taxpayers but also lowers tax rates for higher-income groups.
The broader economic implications of this shift—both for fiscal health and consumption patterns—will be closely watched.

Impact on the Middle Class and Consumption

Tax data suggests that the median gross total income for individuals filing returns ranges between ₹5 and ₹5.5 lakh.
However, since only 6.68% of the population filed income tax returns in FY 2023-24, the taxpaying demographic does not fully represent India’s income distribution.
The exemption of incomes below ₹12 lakh benefits 83.52% of individual taxpayers, while higher earners also see significant reductions.
For instance, an individual earning ₹25 lakh annually could see their tax liability drop by more than a third.
The key question remains: Will this relief translate into higher consumption? Household spending data indicates that urban median monthly consumption is ₹6,334, while rural spending stands at ₹3,866.
Increased disposable income could boost spending on goods and services, potentially generating jobs.
However, past experiences—such as corporate tax cuts that failed to sustain investment growth—raise doubts about whether personal tax reductions will have a lasting economic impact.

Fiscal Cost and Revenue Considerations

The tax cut is estimated to cost the exchequer ₹1 lakh crore. The government is betting on higher demand to drive economic activity, which, in turn, could replenish tax revenues over time.
However, the effectiveness of this “multiplier” effect depends on how additional income is distributed and spent.
Some economists argue that reducing indirect taxes, rather than direct income taxes, might have been a more effective strategy for stimulating consumption, particularly among lower-income groups.

Reforming Corporate Taxation and Compliance

Beyond personal tax relief, the government is also focusing on simplifying corporate taxation to enhance the ease of doing business.
A key challenge in direct taxation has been transfer pricing—the process of ensuring that transactions between related business entities are conducted at fair market value.
The introduction of a “block audit” for a fixed two-year period aims to streamline assessments, reducing both administrative burdens and taxpayer disputes.
Additionally, the government’s rationalization of TDS thresholds and revisions to capital gains taxation demonstrate a broader effort to improve compliance and reduce complexities in the tax system.

Anticipating a New Income Tax Act

A comprehensive reform of the Income Tax Act is expected soon, with the Finance Minister suggesting that the new version will be significantly shorter and devoid of penal provisions.
This restructuring could reinforce trust in the tax system and encourage voluntary compliance.
The combination of tax cuts and simplified regulations raises the ongoing debate: Can tax policy be effectively used to drive spending and economic growth?
While tax relief provides immediate financial relief, its long-term impact on investment, consumption, and fiscal stability remains uncertain.