Govt looks at income tax rate cut to boost demand, trigger private investment
- The tax cuts may be a more efficient measure to enhance disposable income, which in turn would result in higher consumption, and give a fillip to economic activities.
- As the Indian economy grapples with the problem of flagging consumption, policymakers in the government are in favor of rationalizing the existing income tax structure, especially at lower income levels.
Highlights:
- The tax cuts may be a more efficient measure to enhance disposable income, which in turn would result in higher consumption, and give a fillip to economic activities.
- A boost to consumption is being seen as crucial for reviving demand, which in turn is central to restarting the investment cycle, especially rekindling private capital expenditure in consumer-focused sectors.
- The revenue loss from any such measure requires a dynamic analysis
- Since it is expected to spur demand, it requires a general equilibrium analysis to assess the net effect.
- While welfare spending comes with leakages, a tax rate cut at the lower income levels often leads to higher consumption. Tax simplification is seen as a better tool than overt spending on welfare schemes
- While India has posted an average GDP growth rate of 7 per cent plus over the last three years, it is faced with significant challenges from muted agricultural growth, weak exports and lackluster private investment amid flagging consumption demand.
- Private investment has not picked up across the board and subdued demand remains a concern for the Indian industry.
- Private Final Consumption Expenditure (PFCE), an indicator of consumption demand, dropped as a share of GDP to 52.9 percent the lowest level in the 2011-12 base year series.
- Consumption expenditure grew by 4 percent, the slowest growth rate in the last two decades excluding the pandemic year.
- The government has been focusing on fiscal consolidation over the last few years, with an aim to bring down the fiscal deficit to 5.1 per cent of the GDP in 2024-25 and reduce it further to below 4.5 per cent in 2025-26.
Prelims Takeaway
- FRBM Act
- Direct Taxes