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Will Cutting tax-rates help the Indian Economy?

Decoding the impacts of cutting personal tax

Union Finance Minister of India Nirmala Sitharaman has said that the Modi 2.0 government is thinking of cutting personal tax rates to revive growth. According to a report of Hindustan Times, FM Nirmala Sitharaman said, “Tax rate Cut is amongst many things we are considering to boost economic growth” at the ‘The Hindustan Times Leadership Summit’ on December 7.

Cutting tax rates

How the tax cut can help revive the Indian Economy?

The government has a valid reason for thinking to cut down personal income tax rates. Economic growth as shown by GDP numbers has been sliding continuously. The GDP numbers of the past six quarters dipped from 8 %, 7%, 6.6%, 5.8%, 5% to 4.5% recently.

As per the experts, the main reason for this slowdown is the sharp decline in consumer demand. The decline in consumer demand is the result of high unemployment, weak wage growth (especially in rural areas), and uncertainty about future economic prospects. In many parts of the country, daily wagers have no work – on average for about half the month. MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act, 2005) data show that the demand for Manmohan Singh’s flagship rural employment program has gone up.

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The sale of consumer goods is sharply down. Thermal plants are operating at just 50 percent of their full capacity. This means that half the thermal capacity is not operational due to a lack of demand for power.

Cutting personal tax at this time will provide more disposable income to the people. They might spend that extra money, (what economists and government hope) to give a boost to the Indian economy.

Hindustan Times reported, Nirmala Sitharaman also said that “from now on, the taxation regime will be simplified, exemption free”.

Cutting tax rates

It has always been expected that if there is an income tax rate cut, it will come with the removal of existing exemptions.  Generally, a taxation system that doesn’t have any or few exemptions is considered to be more efficient, and easier to handle for both the government and the tax-payers.

However, the question is, whether a tax cut will actually help in boosting the economy?

Cutting personal tax will result in loss of revenue for the government. This will impact the fiscal deficit. The amount of total loss for the government will depend upon how deep the tax cut is.

Boost in the economy will also depend upon how much people will spend the extra money they will have left from the tax-cut. Will they save that money. It will also depend on how secure they feel about the future and how faster the current sentiments about the economy improves.

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