Budget 2020 Expectations: Personal income tax rate cut must be avoided – here is why

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Published: January 24, 2020 4:21:57 PM

Budget 2020 Expectations for Income Tax: The Modi government is left with difficult choices to meet the expectations that run very high even as the fiscal space to stimulate the economy is very limited.

Income Tax Budget 2020 Expectations, Budget 2020 Expectations for Income TaxUnion Budget India 2020-21: One of the expectations from the Budget is to provide boost to personal consumption by cutting personal income taxes.

Budget 2020 Expectations for Income Tax: With real GDP growth weakening to sub-5 per cent level due to lower manufacturing and productions on account of lower demand, Finance Minister Nirmala Sitharaman will have to announce the Union Budget 2020-21 amidst a very unfavourable background. Moreover, with the actual revenue receipt being just 48.6 per cent of the Budgeted revenue receipt for 2019-20, the Modi government is left with difficult choices to meet the expectations that run very high even as the fiscal space to stimulate the economy is very limited.

One of the expectations from the Budget is investment push by relaxing the fiscal deficit targets, which, according to the Ecoscope report by Motilal Oswal Institutional Equities, must be attained, but with strict conditionality and only after the true economic and fiscal narrative is placed before the country.

The other popular expectation from the Budget is to provide boost to personal consumption by cutting personal income taxes, which according to the Ecoscope report, must be avoided despite the very strong urge, as the limited space available before the government to put the economy back on groth track must be exclusively utilised for investment spending.

“The strong urge to boost personal consumption spending by cutting taxes or discouraging savings must be avoided because the problem lies in subdued personal income growth. If personal consumption is incentivised but income growth remains weak (as has been the case over the past 6-7 years), the economy will remain structurally vulnerable – and in fact worsen faster,” said the report.

Budget 2020: Inadequate revenue a big challenge for government

On the contrary, according to the report by Motilal Oswal Institutional Equities, deliberations should happen on whether or not personal savings should be incentivised by increasing the deduction limit under various sections, viz. 80C, 80E, 80EE etc.

“Although it will entail small fiscal costs and may hurt personal consumption growth over the short term, it could potentially address the most serious structural issue and help ease the domestic financial markets, which would help lower the interest rates,” said the report.

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