Announcement: Markets divided on timing

Speculation is high that a reduction in personal income taxes is on the cards next, following the surprise move to cut corporate taxes last month, Singapore banking group, DBS, said on 29 Oct 2019.

With the all-in corporate tax rate at 25%, it is likely that personal income tax rates, which are at 30%+ levels, will also be lowered, surcharges notwithstanding.

“Markets are divided on the timing of such a move,” wrote DBS Economist Radhika Rao in the Flash report “India: Personal income tax cuts likely in the pipeline”.

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 FY21 Budget due in February 2020, according to Rao.

The share of direct taxes to India’s total tax revenues peaked at 61% in FY10 and has since stabilised around 55% last year.

As a percentage of nominal GDP, tax revenues make up around 11%, within which the share of direct taxes has hovered around 5.5-6% of GDP in the past three-four years.

Income tax collections amounted to Rs.4.7 trillion last year i.e. 2.5% of GDP. This year’s target for personal income tax is budgeted to rise by an ambitious 23% YoY compared to a subdued 10% growth in FY19.

The top marginal tax rate is 42.7% imposed on incomes above Rs.5 million, which is higher than the average in the region at 30%. There is also an additional cess of at 4% imposed on the taxpayers.

Returns are filed by about 55 million individuals, which make up a fifth of total households and about 5% of the economy’s estimated working age population.

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%, 20%, 30% 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.

“We note the imposition of additional surcharges on the high net worth individuals in the FY20 Budget in July (Rs.5 million onwards), which has already raised the net burden on the high-income brackets.

Any increase in the basic exemption limit will be beneficial for the small taxpayers whose total income is below Rs.0.5 million, said DBS, noting that the Feb19 Budget had already provided rebate relief for Rs.0.5 million and below.

Short-term fillip to consumption spending is likely, while a sustained improvement will require confidence in employment prospects and a sustained push towards raising job creation. Lower tax outgo leaves room for higher discretionary spending, which will boost demand for white goods, travel etc, but unlikely to evidently improve for large ticket spending such as real estate. fiinews.com