Following the surprise move to cut corporate taxes last month, speculation is high that a reduction in personal income taxes is on the cards next in India, a report by Singapore's DBS Bank said on Tuesday. With the all-in corporate tax rate at 25 per cent, it is likely that personal income tax rates, which are at 30 per cent plus levels, will also be lowered, surcharges notwithstanding, it suggested.
DBS Bank report
"Markets are divided on the timing of such a move," added DBS in the Flash report 'India: Personal income tax cuts likely in the pipeline'.
A combination of an increase in the basic exemption limit and introduction of a differentiated tax rate structure for higher incomes might be on the cards - for instance, the minimum tax slab could be raised to Rs 0.50 million vs Rs 0.25 million presently, according to DBS. Tax rate on incomes over Rs 0.5 million might be lowered and subjected to differentiating rates (10 per cent, 20 per cent, 30 per cent etc.). Such an arrangement will lower the burden on smaller taxpayers, modestly better for mid-tier but raise tax incidence on higher tiers, said the bank report.
Speculation is that the announcement is imminent, but the authorities might also prefer to bide time and announce any rework in the personal income taxes at the budget due in February 2020, according to the report. Any increase in the basic exemption limit will be beneficial for the small taxpayers whose total income is below INR0.5 million, said DBS, noting that the February 2019 Budget had already provided rebate relief for Rs 0.5 million and below. Estimates of the likely cost of a review of the existing income tax slabs range from Rs 1 trillion to Rs 1.5 trillion.
Considering the revenue arrangements with the states, the impact on the centre's finances could be to the tune of 0.3-0.5 per cent of GDP, DBS pointed out. The share of direct taxes to India's total tax revenues peaked at 61 per cent in FY2009-10 and has since stabilised around 55 per cent last year. As a percentage of nominal GDP, tax revenues make up around 11 per cent, within which the share of direct taxes has hovered around 5.5-6 per cent of GDP in the past three-four years. Income tax collections amounted to Rs 4.7 trillion last year i.e. 2.5 per cent of GDP.
Personal Income Tax to rise
This year's target for personal income tax is budgeted to rise by an ambitious 23 per cent YoY compared to a subdued 10 per cent growth in FY2018-19. The top marginal tax rate is 42.7 per cent imposed on incomes above Rs 5 million, which is higher than the average in the region at 30 per cent. There is also an additional cess of at 4 per cent imposed on the taxpayers. Returns are filed by about 55 million individuals, which make up a fifth of total households and about 5 per cent of the economy's estimated working age population.