Budget 2020: Income Tax rate cut to matter little, Modi govt must opt for expansionary fiscal policy; here’s why

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New Delhi | January 31, 2020 8:51 PM

Budget 2020 Income Tax expectations: Ghatak has suggested that in Budget 2020, FM Sitharaman must consider putting more money in the hands of poorer groups who are likely to spend more from their income.

budget 2020 date, budget 2020 date india, budget 2020 india, budget 2020 expectations, budget 2020 income tax expectations, budget 2020 income tax predictions, budget 2020 predictions Budget 2020 Income Tax expectations India: Ghatak has added that the top 5% income taxpayers contribute 60 per cent of personal income tax revenue. 

Budget 2020 Income Tax rate cut, if announced by Finance Minister Nirmala Sitharaman, will achieve precious little, according to London School of Economics professor Maitreesh Ghatak. Ghatak, who is a professor of Economics, has suggested in a column in IE that the Narendra Modi government must announce an “expansionary fiscal policy” to revive the Indian economy. Ghatak’s opinion comes even as there are strong pre-budget 2020 expectations around Income Tax rate cut especially after the Central government cut corporate tax rates. Ghatak has said that Income Tax cuts in Budget 2020 will by and large have an impact on only 3-5 per cent of the total adult population of India. Moreover, revenues generated through Income Tax stand at 2.5 per cent of the Gross Domestic Product (GDP) of India, he said.

According to Ghatak that apart from the fact that a small part of the population will be affected by probable Income Tax rates cut in Budget 2020, even if the taxpayers spend the entire amount of the money that will be in their hands due to savings on income tax, it will have a very small impact related to the GDP. Ghatak has added that the top 5% income taxpayers contribute 60 per cent of personal income tax revenue. The rich class, which pays most of the tax, generally do not spend more as they tend to save more. Apart from this households are likely to utilise the money in savings or repaying loans instead of consuming.

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Ghatak has suggested that in Budget 2020, FM Sitharaman must consider putting more money in the hands of poorer groups who are likely to spend more from their income. This will be more effective than going for an income tax cut that will only benefit the rich. In the upcoming Union Budget 2020, FM Sitharaman should not underestimate the pivotal role of the informal sector in the Indian economy, Ghatak added. He said that the Modi government must announce an expansionary fiscal policy which will look to harnesses the energy of the informal sector. If this happens, it will automatically boost aggregate demand, he opined.

Economist Abhijit Banerjee, who bagged the 2019 Nobel Memorial Prize in Economic Sciences, has also said that exempting a few people from the income tax net during Budget 2020 will be a silly thing to do as the probable move would not spur demand in the economy. Instead, Banerjee had advised the Centre to spend more on India’s infrastructure with an aim to create more employment opportunities.

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