As India approaches the Union Budget for 2025, speculation is rife about potential changes to the income tax structure, particularly regarding the highest tax slab of 30%. This slab, which applies to individuals earning above Rs 15 lakh annually, has been a subject of debate among policymakers, economists and taxpayers.

The question on everyone’s mind is whether the government will eliminate or revise the 30% tax slab in the upcoming budget. While no official announcements have been made, several factors suggest that such a change could be on the horizon.

Arguments for Removing the 30% Slab

1. Boosting Disposable Income and Consumption

One of the primary arguments for removing or reducing the 30% slab is to increase disposable income for taxpayers. Higher disposable income could lead to increased consumption, which is crucial for economic growth. With private consumption accounting for nearly 60% of India’s GDP, any measure that puts more money in the hands of consumers could stimulate demand and drive economic activity.

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2. Simplifying the Tax Regime

The government has been working towards simplifying the tax structure to make it more taxpayer friendly. The introduction of the new tax regime in Budget 2020, with lower rates but fewer deductions, was a step in this direction. Removing the 30% slab could further simplify the system, making it easier for individuals to understand and comply with tax laws.

Currently, with Rs 75,000 deduction in place, people earning up to Rs 7.75 lakh effectively don’t need to pay any tax. The expectation is to make this tax-free for income up to Rs 10 lakh. Industry experts feel that the taxation should be at 20% up to Rs 20 lakh, and for anyone earning beyond 20 lakh, there should be a tax slab of 25%.

Adhil Shetty, CEO of Banbazaar.com, says, “The data shows that the most new regime brackets have been enhanced by at least 20%, except one. The 30% slab is stuck at the Rs 15 lakh level since the start. If we update it by 20%, it needs to be at Rs 18 lakh. Without this update, taxpayers with higher income get burdened with a disproportionately higher share of the taxes.”

3. Attracting and Retaining Talent

High tax rates can discourage skilled professionals from working in India or incentivise them to relocate to countries with more favourable tax regimes. By reducing the top tax slab, India could become more attractive to global talent, fostering innovation and economic growth.

What Are the Challenges?

1. Revenue Implications

The 30% slab contributes significantly to the government’s tax revenue. Removing or reducing it could lead to a substantial revenue shortfall, which the government may find difficult to offset, especially given its commitment to increased spending on infrastructure, healthcare, and social welfare programs.

2. Inequality Concerns

Critics argue that reducing taxes for higher-income groups could exacerbate income inequality. Instead of benefiting the middle class, such a move might disproportionately favour the wealthy, leading to social and economic imbalances.

3. Fiscal Deficit

India’s fiscal deficit is already under pressure due to rising expenditures and slower-than-expected revenue growth. Any reduction in tax rates could widen the deficit, potentially leading to higher borrowing and inflationary pressures. The govt has a target of keeping the fiscal deficit for the current financial year at 4.5%.

4. Alternative Measures

Instead of removing the 30% slab, the government could consider other measures to ease the tax burden, such as increasing deductions, raising the threshold for the highest slab, or introducing targeted tax relief for specific sectors or demographics.

What Can We Expect in Budget 2025?

While the complete removal of the 30% slab seems unlikely, the government might consider revising the tax structure to provide some relief to taxpayers. Possible measures include:

  1. Increasing the threshold for the 30% slab: Raising the income limit for the highest slab from ₹15 lakh to ₹20 lakh or more could provide significant relief to middle- and upper-middle-class taxpayers.
  2. Introducing a new slab: The Budget 2025 could introduce an intermediate slab between 20% and 30% to reduce the tax burden on those earning slightly above ₹15 lakh.
  3. Enhancing deductions: Increasing deductions under sections like 80C, 80D, and 80G could indirectly reduce the effective tax rate for people in the highest tax slab.

As the budget announcement approaches, all eyes will be on the Finance Ministry to see how it addresses taxation complexities and boost consumption by giving expenditure boost to the economy.