NEW DELHI: Will the Government give the salaried class, a higher standard deduction to put money in people’s pockets? Or will they try to do the same thing by juggling the tax slabs or by a combination of the two? Many say it makes sense to budget for at least one change, as the Government wants to give consumption a kick-start and the marginal propensity to consume after the very poor, is high among salaried people.
A standard deduction is given to the salaried class in lieu of deductions which businessmen and consultants can claim for various expenses. India has had a checkered history with this deduction which was done away within 2004-2005 budget flowing the argument that deductions created more anomalies.
However, the NDA Government after persistent demands by the urban middle class, one of its main voting planks brought it back in finance act of 2018 while subsuming other tax-deductible allowances such as for transport and medical reimbursements. The standard deduction given then at Rs 40,000 was raised last year to Rs 50,000 per annum.
However many economists and financial experts they expect the Government to tweak it once more and raise it. “The logic for raising the standard deduction is that middle class spends a large part of any tax gains it gets unless they are tied to savings,” said S.K.Sarkar, past president of the Indo-American Chamber of Commerce. “However, tax gains we must remember can also be given by juggling the tax slabs … currently, the top tax slabs kicks in at just Rs 10 lakh per annum income while theoretically, a person can pay nil income tax up to an income of Rs 5.5 lakh.”
Though the tax slabs are 5 per cent for those earning between Rs 2.5 lakh and Rs 5 lakh and 20 per cent for those earning between Rs 5 and Rs 10 lakh, various deductions allow a person earning up to Rs 5.5 lakh to zero taxes.
“We expect the Government to at least come up with a higher standard deduction if not tinker with the slabs to give relief to the middle-class personal income tax payers,” said Raman Chadha, director, BRS Tax Consultancy.
Economists point out that there are studies which show that the middle class tends to behave the same way as the poor in terms of consumption spends when faced with a tax windfall. A 2009 study by American and Israeli economists - Jeffrey R. Campbell and Zvi Hercowitz – said existing evidence from consumption dynamics following tax rebates suggests middle-class households “spend no less, and perhaps more, out of these temporary income changes than do poorer and more obviously constrained households.”