With just about a week left to the union budget 2020, sources in the know told CNBC-TV18 that the Narendra Modi government is still contemplating whether to extend relief to the taxpayers by cutting personal income tax rates.
Sources privy to the developments told CNBC-TV18 that a final decision on the matter will be taken by the Prime Minister Narendra Modi himself and that could come only by early next week. However, sources said PM Modi could also opt for not giving a cut or a relief on the personal income tax font given the current fiscal situation.
According to multiple people familiar with the development, if PM Modi decides to go ahead with the decision to extend a relief on the personal income tax, then some of the options which are under discussion include: firstly, to cut tax rates as per the suggestion of task force on direct tax simplification.
The task force headed by former member of the Central Board of Direct Taxes (CBDT) Akhilesh Ranjan had suggested to reduce the tax rate to 10 percent for income up to Rs 10 lakh, to reduce the tax rate to 20 percent for income up to Rs 20 lakh and for income between Rs 20 lakh to Rs 2 crore at 30 percent and for Rs 2 crore and above at 35 percent.
The second option, according to sources under discussion is to move up the existing tax slabs, especially the Rs 5 lakh slab to a higher range of Rs 6 lakh or Rs 7 lakh, a call depending upon how much revenue forgone the government can absorb on this account.
The third option is to raise the minimum exemption limit from current Rs 2.5 lakh and the fourth option is to give a roadmap towards a staggered personal income tax reduction citing poor tax collections.
Sources said the government could resort to the fourth option as it in the past had also taken the same option for reducing the corporate tax rates in the country.
If this option is exercised, then the government will be expressing the intent of being sympathetic and reducing the tax rates but due to poor fiscal appetite, the government is wanting to go ahead on this in a staggered manner, said people familiar with the matter.
Another proposal is to increase tax-saving measures through various options under Section 80 of the Income Tax Act especially for relief on home loans, National Pension System (NPS) etc, sources in the know told CNBC-TV18.
The government is also considering to introduce new tax saving options through infra bonds. The proposal is to have an option of investing in infra bonds up to Rs 50,000 per annum for a tax saving to be claimed under section 80 of IT Act and will also help the government to raise funds for the flagship national infrastructure pipeline, sources close to the development said.
However, all these proposals are still in works as the government is contemplating various ways to spur consumption. The Modi government has two options, either to increase rural spending to spur consumption or go ahead with a combination of including a personal income tax cut and hike rural spending.
Some of the discussions advocating against a cut in personal income tax rates are based on the analogy that India pays income tax at rates much less than countries like Sweden, Japan, Austria, Netherlands, Belgium, Ireland, Australia, China, France and Germany.
On the other hand, the reason cited to extend a cut or a relief on personal income taxes is backed by the idea that the government has already reduced corporate tax rates and it should now be coupled with personal income tax cuts as this government wants to have pro-poor and pro-middle class policies.
Sources also added that if at all a cut comes, then it will be for those with an income up to Rs 20 lakh per annum. Let's see what finally gets unveiled in the union budget 2020 on February 1.
