Budget expectations: Finance Minister Nirmala Sitharaman is slated to unveil the Union Budget 2025 on February 1, with a strong emphasis on the potential overhaul of the current tax system. Amid ongoing government promotion of a new tax regime, much speculation surrounds the potential revisions to the income tax structure, specifically focusing on the contentious 30% tax bracket. This top tax slab, applicable to individuals with an annual income exceeding Rs 15 lakh, has been a topic of debate among various stakeholders including policymakers, economists, and taxpayers.
Experts have called for the elimination or modification of the 30% tax slab. While no formal declarations have been issued, various indicators suggest that a change in this regard could be imminent.
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1. 30% Tax slab
The 30% income tax slab has remained unchanged at Rs 15 lakh since 2020. One of the main reasons cited for eliminating or lowering the 30% tax slab is to boost the disposable income of taxpayers. This increase in disposable income has the potential to spur greater consumption, which plays a crucial role in driving economic growth. Given that private consumption makes up approximately 60% of India's GDP, any measure that injects more money into the pockets of consumers could help stimulate demand and enhance economic activity.
Experts anticipate that the government may adjust the tax slabs in the new regime, possibly by shifting or doing away with the 30% tax slab for incomes above Rs 20 lakh rather than the current threshold of Rs 15 lakh.
2. New Tax Regime
The government has been talking about simplifying the tax structure to make it easier for taxpayers. The New Tax Regime introduced in Budget 2020 featured lower rates and fewer deductions, aligning with this objective. Eliminating the 30% tax slab could further streamline the system, improving understanding and compliance with tax laws.
Currently, individuals earning up to Rs 7.75 lakh can effectively avoid paying taxes with a Rs 75,000 deduction in place. There is a proposal to increase this threshold to Rs 10 lakh for tax-free income. Industry experts suggest a 20% tax rate for income up to Rs 20 lakh, with a 25% tax slab for those earning beyond Rs 20 lakh.
Adhil Shetty, CEO of Banbazaar.com, said: "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. 30% Tax slab and govt's revenue
The 30% tax bracket plays a crucial role in bolstering the government's tax revenue. Eliminating or decreasing it could result in a considerable deficit in revenue, posing challenges for the government to make up for, particularly with its prioritization of augmenting funds towards infrastructure, healthcare, and social welfare initiatives.
4. Slower growth
India's fiscal deficit is already facing pressure due to rising expenditures and slower-than-expected revenue growth. If tax rates are reduced, there is a risk of widening the deficit, which could result in higher borrowing and inflationary pressures. The government aims to maintain the fiscal deficit at 4.5% for the current financial year.
5. What can be done
Instead of lowering the 30% tax slab, the government could explore alternative measures to alleviate the tax burden. This could include increasing deductions, raising the threshold for the highest tax slab, or introducing targeted tax relief for specific sectors or demographics.
Increasing the income threshold for the top tax bracket from Rs 15 lakh to Rs 20 lakh or higher has the potential to offer substantial relief to taxpayers in the middle and upper-middle income brackets.
The reduction in tax rates under the New Tax regime applies to income slabs up to Rs 15 lakhs. For taxpayers with total income exceeding Rs 15 lakhs, the tax rate remains fixed at 30%, irrespective of the tax regime chosen. Consequently, whether an individual's total income is Rs 20 lakhs or Rs 20 crore, they will be subject to a tax rate of 30%. This creates a considerable disparity for taxpayers at the lower end of the income spectrum, resulting in a reduced spendable surplus.
6. Tax slab: 25%
In the upcoming Budget 2025, there is a possibility of incorporating a new tax slab between 20% and 30% to alleviate the tax burden for individuals earning just above Rs 15 lakh. According to Akhilesh Ranjan, a former CBDT member and current advisor at PwC, the government may want to contemplate the implementation of a new tax bracket of 25% for individuals earning between Rs 15 lakh and Rs 20 lakh. This proposed change has the potential to stimulate consumer spending by allowing these taxpayers to have more disposable income, which they could then utilize for purchasing items such as refrigerators and televisions.