The Indian government is reportedly considering slashing personal tax rates for some income groups as it looks to spur consumption in the country.

What Happened: This potential tax relief could be unveiled when the new Narendra Modi administration presents its first budget in July, Reuters reported, citing sources.

According to post-election surveys, voters are increasingly concerned about inflation, unemployment, and declining incomes. Despite the Indian economy’s impressive 8.2% growth rate in 2023-24, consumer spending has lagged, growing at only half that pace.

In his address, while forming the National Democratic Alliance government, the prime minister had emphasised his commitment to enhancing middle-class savings and improving their quality of life. Reducing personal tax rates is seen as a key measure to achieve these goals, potentially boosting both consumption and savings for the middle class, the sources indicated, speaking on condition of anonymity due to the confidentiality of budget discussions.

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The proposed tax cuts would target individuals earning over ₹15 lakhs annually, though the exact threshold is still under discussion. Currently, under a tax scheme introduced in 2020, annual income up to ₹15 lakh is taxed at rates between 5% and 20%, while income over ₹15 lakh is taxed at 30%.

The steep and disproportionate six-fold ramp-up in tax rates when pay increases from ₹3 lakh to ₹15 lakh has been criticised as excessively burdensome by some commentators. The government is also reportedly considering lowering personal tax rates for those earning around ₹10 lakh annually and revising the threshold for the 30% tax rate under the old tax regime.

Any potential loss in tax revenue from these cuts could be mitigated by the resulting increase in consumption among the affected income groups, the news agency reported, citing a second source. The government is targeting a fiscal deficit of 5.1% of gross domestic product for the financial year ending March 2025.

Strong tax collections and a massive dividend from the Reserve Bank of India are expected to provide the government with the flexibility needed to plan the budget.

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