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The recent announcement of the 8th Pay Commission in India, promising substantial salary increases for government employees, has ignited a fervent demand for income tax relief among private sector workers. This significant increase in government salaries is expected to boost demand, yet this positive impact would be offset for the private sector unless paired with a decrease in the tax burden. The current economic climate is characterized by a widening gap between the government's and private sector employees' financial situations. This disparity fuels the argument that the government should provide similar benefits to private sector workers who comprise a significant portion of the tax-paying middle class to balance the economic scale. Experts and political analysts alike emphasize the need for this measure to bolster consumption, a crucial driver of India's GDP, which currently relies heavily on consumer spending (55-60%). The government’s previous attempt to stimulate investment and consumption through corporate tax reductions proved ineffective, with high corporate profits failing to translate into commensurate wage increases that keep pace with inflation. This failure highlights the need for a more direct approach to inject funds into the hands of individual taxpayers.
The demand for tax relief is not merely an isolated plea; it's a reflection of a deeper issue with India's current income tax structure. Analysts like Amitabh Tiwari point to two key flaws: first, the relatively low threshold at which the highest income tax bracket (30%) kicks in—Rs 15 lakh—is considerably lower than in many other developed nations such as the US. This places a disproportionate tax burden on the middle class, stifling consumption. Second, while the number of tax returns filed has risen significantly, the actual number of individuals paying substantial taxes has increased far less. This discrepancy is partly due to an increase in the income tax exemption limit over the years, which achieves socio-political objectives but falls short of economic objectives. This effectively leaves a smaller percentage of the population carrying the burden of a large percentage of tax revenue. Several countries do not have an income tax exemption, a system that could perhaps benefit India in terms of stimulating and balancing revenue streams. This model warrants further investigation as a possible solution to reduce the current burden on the middle class.
To address these concerns, suggestions for modifying the income tax structure have emerged. These proposals include gradually widening the tax net and increasing tax slabs to shift the highest tax rate to a significantly higher income level, perhaps Rs 50 lakh, instead of the current Rs 15 lakh. Such a restructuring would redistribute the tax burden more equitably and provide the middle class with greater disposable income to fuel consumption. There's considerable anticipation for potential changes in the income tax slabs in the upcoming Budget 2025-26, based on early indications. This anticipation stems from the recognized importance of consumer spending in driving the Indian economy, emphasizing the impact of increased disposable income on consumption-driven growth. Experts believe that such measures are necessary to achieve economic stability. While the 8th Pay Commission caters to the public sector, focusing on private sector tax relief is equally crucial for creating a more balanced and economically vibrant India. The government’s response to this demand will be pivotal in shaping the economic landscape of the nation in the near future, highlighting the intricate balancing act between fiscal responsibility and economic growth.
Source: Why 8th Pay Commission is spurring calls for income tax relief in Budget