Personal income taxes have always evinced great interest in budgets year after year. A country’s budget has significant impact on individual’s daily budget. Our highest tax slab kicks in at much lower income compared to international standards. In this post, we will have a look at the possible scenarios which Finance Minister Jaitley has with respect to personal income taxes. The current tax structure has been listed in the below table.

Current State
Income

(Rs. p.a.)

0 to 2.5 Lakhs 2.5 to 5 Lakhs 5 to 10 Lakhs >10 Lakhs
Current Tax Rate Nil 5% 20% 30%

Scenario I: Change of Tax Slabs

There has been a long standing demand to increase the exemption limit for income tax. In this scenario, tax free income limit is increased to Rs. 3 lakhs. Tax rate for Rs. 3 to Rs. 10 lakhs is 10%. A new tax slab of Rs. 10 to Rs. 20 lakhs is created carrying a tax rate of 20%. Income above Rs. 20 lakhs to be taxed at 30%. This will lead to savings of Rs. 5,000 p.a. to Rs. 1,00,000 p.a. for various tax brackets. This scenario is similar to the one proposed by FICCI last year.

Scenario I
Income (Rs. p.a.) 0 to 2.5 Lakhs 2.5 to 3 Lakhs 3 to 10 Lakhs 10 to 20 Lakhs >20 Lakhs
Proposed Tax Rate Nil Nil 10% 20% 30%
Savings p.a. Nil 5,000 50,000 1,00,000 Nil

 

Scenario II: Combination of Change of Tax Slabs and Tax Rates

In this scenario, exemption limit is increased to Rs. 5 lakhs. New tax brackets of Rs. 5 lakhs interval are created from Rs. 5 to Rs. 30 lakhs with a step up tax rate of 5% for next bracket. Income above Rs. 30 lakhs to be taxed at 30%. This will lead to savings of Rs. 25,000 p.a. to Rs. 1,00,000 p.a. for different tax brackets.

Scenario II
Income (Rs. p.a.) 0 to 2.5 Lakhs 2.5 to 5 Lakhs 5 to 10 Lakhs 10 to 15 Lakhs 15 to 20 Lakhs 20 to 25 Lakhs 25 to 30 Lakhs >30 Lakhs
Proposed Tax Rate Nil Nil 5% 10% 15% 20% 25% 30%
Savings p.a. Nil 25,000 75,000 1,00,000 75,000 50,000 25,000 Nil

How feasible are the two scenarios?

Individual income taxes are estimated to account for 20% of total receipts of government for 2017-18. Tweaking tax slabs and rates will result in loss of revenues for government.

In case of Scenario I, as per my estimates, government could lose revenues to the tune of Rs. 27,500 crores (c.6% of individual income taxes budgeted for FY2017-18).  Out of this Rs. 6,000 crores can be recouped in form of GST and corporate taxes assuming entire amount is spent (excluding lever impact), resulting in net loss of Rs. 21,500 crores, which is just 1% of total receipts for 2017-18.

In case of Scenario II, government could lose revenues to the tune of Rs. 88,000 crores (c.20% of individual income taxes budgeted for FY2017-18).  Out of this Rs. 19,000 crores can be recouped in form of GST and corporate taxes assuming entire amount is spent (excluding lever impact), resulting in net loss of Rs. 69,000 crores, which is 3% of total receipts for 2017-18.

Considering the above cost benefit analysis, FM Jaitley should take risk and go for Scenario I. Going into election year, it would provide a relief to middle class and have a positive spiraling effect on economy.

 

 

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