Bet on Budget 2024 bringing tax reliefs; it could pay off this time

While we await the actual announcements, it's speculated that the government is considering a wide range of things to do.
Bet on Budget 2024 bringing tax reliefs; it could pay off this time
(Express Illustration)

The tax-cut expectations fairy is back in the spotlight with Finance Minister Nirmala Sitharaman preparing to present her seventh union budget next month.

The hankering for lower tax rates isn't uncommon ahead of every budget, but this time the bridge doesn't seem too far to cross.

As Prime Minister Narendra Modi's party couldn't wing it on its own to form the government, it's wagered that his coalition partners will bring pressure to bear on Sitharaman and team to be generous. In particular, personal income taxpayers are rarely appreciated for their unrequited payments and waiting endlessly to be rewarded with lower taxes.

Moreover, private consumption, the biggest engine that runs the growth fountain, is pulsing at its slowest pace ever and given the high prices of vegetables, fruits and everything else, only an income tax rate cut is the seen as the surest way to leave more money in the hands of households.

The big question though is whether Sithraman will tweak tax reliefs or reduce tax rates to achieve this. One would like to see both, but then chance would be a fine thing.

While we await the actual announcements, it's speculated that the government is considering a pretty wide range of things to do. From lowering rates for certain categories of individual income earners to boost consumption to raising the annual cash dole to small farmers from Rs 6,000 to Rs 8,000, to increasing payments under the minimum job guarantee programme, and so on. There's talk of introducing a new tax bracket even, besides increasing the current limit of deduction under section 80C to Rs 2 lakh from Rs 1.5 lakh. It has remained unchanged since 2014 and the much-needed revision will be a crowd-pleaser.

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Among all, the biggest item will be tax rates. Currently, there are six tax slabs and the new tax regime increased the basic exemption limit to Rs 3 lakh, from Rs 2.5 lakh last year. The next four slabs include those earning between Rs 5 lakh and Rs 15 lakh, who are variously taxed at 5% to 20%. Income earners above Rs 15 lakh attract the top tax rate of 30%, plus surcharges.

As per reports, the Centre is considering raising the tax exemption threshold to Rs 5 lakh, besides offering reliefs for all those within the Rs 5 lakh and Rs 15 lakh income bracket, which is pretty much everyone. Now that the economy is in a relatively better shape and the country's finances too, it may not smother the treasury as much.

If these changes are indeed announced in the budget, it'll be a significant departure from the government's standpoint prior to elections. Just in February, officials stressed that frequent changes in tax rates 'don't help,' leading to instability and tax uncertainty.

But even without any major giveaways, personal income tax revenue has been on a tear. They exceeded corporate tax collections for the second successive year in FY24 and are likely to rake in more dough this fiscal too. As per the interim budget estimates for FY25, corporate tax collections are pegged at Rs 10.4 lakh crore, while personal income tax collections are projected at Rs 11.6 lakh crore net of refunds.

Interestingly, it was the corporates who were rewarded with a hefty tax cut that went from 30% to 22% in 2019, yet officials believe the rate of growth in corporate collections will remain 'moderate.' In contrast, personal income tax collections are only moving higher and higher, thanks to better compliance and broadening tax base. In other words, notwithstanding lower tax rates, corporate tax payouts are modest, while individuals are contributing much more to the exchequer. The trajectory seems skewed, but the government is content that we are heading in the right direction. Globally too, personal income tax collections outstrip corporate tax revenues.

Meanwhile, efforts to simplify and rationalise the tax regime and reduce litigation have begun bearing fruit. The government struck a rich vein with the number of taxpayers filing income tax returns more than doubling to Rs 7.78 crore in the past 10 years. The number of Income Tax Returns (ITRs) filed in FY23 stood at 7.78 crore, showing an 104.91% increase as against the 3.8 crore ITRs filed in FY14.

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What's more is that the tax-to-GDP ratio is expected to hit a record high of 11.7% of GDP in FY25 from 11.6% in FY24 and 11.2% in FY23, thanks to the increasing share of direct taxes. In fact, direct tax-to-GDP ratio, which reflects the share of taxes in the overall output generated, rose to a 15-year high of 6.11% in FY23, official data showed.

But tax buoyancy -- the growth rate of taxes in relation to the economy’s nominal growth rate -- declined to 1.18% in FY23 from 2.52% in FY22 and 1.29 in the pre-Covid year FY19.

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