Finance Minister Nirmala Sitharaman’s recent budget announcement, allowing individuals earning up to ₹12 lakh per annum to pay zero income tax, has sparked debates on its actual impact on the Indian economy. While this move is being projected as a measure to boost disposable income and consumption, the reality is that only around 1.6% of India’s population actually pays income tax. This raises a crucial question: Will this policy significantly stimulate economic growth, or should the focus be on broader tax reforms like GST reductions?
The Reality of Income Tax in India
India has a population of over 1.4 billion, yet only a small fraction—approximately 8 crore individuals—file income tax returns. Out of these, even fewer actually pay taxes after deductions and exemptions. Given this, increasing the tax exemption limit to ₹12 lakh may not generate substantial economic momentum simply because it affects a relatively small portion of the population.
Most of the taxpayers who benefit from this exemption are already part of the urban middle class and higher-income segments, who may not significantly alter their spending patterns due to this relief. Instead of driving large-scale economic growth, the move may only offer marginal relief to those who already have discretionary income.
GST: The Tax That Everyone Pays
Unlike income tax, which applies to a small percentage of the population, GST (Goods and Services Tax) affects every single citizen. From daily essentials to luxury goods, GST is embedded in almost every purchase. Lowering GST rates would immediately benefit a larger section of society, particularly the middle class and lower-income groups, who spend a significant proportion of their earnings on consumption.
For instance, a reduction in GST on essential commodities like food items, electronics, and transport services would lead to lower prices, increasing overall demand. More demand means more production, more jobs, and a stronger economy. This has a direct impact on inflation control as well.
Moreover, one of the biggest issues with GST is its uniform application across different income groups. A person earning ₹10 lakh per month and a person earning ₹10,000 per month both pay the same GST on essential goods and services. This makes GST a regressive tax, disproportionately impacting lower-income individuals who spend a higher percentage of their earnings on daily needs. Reducing GST rates, especially on necessities, would provide greater relief to those who need it most.
Comparing the Impact: Income Tax Cuts vs. GST Reduction
- Who Benefits?
- Income tax cut: Helps the top 1.6% of earners.
- GST cut: Helps 100% of consumers, especially the middle and lower-income groups.
- Impact on Spending Power
- Income tax cut: Beneficiaries may save rather than spend, limiting its economic impact.
- GST cut: Directly reduces prices, boosting demand and consumption.
- Economic Growth Potential
- Income tax cut: Limited impact due to the small taxpayer base.
- GST cut: Broad impact as it affects all businesses and consumers, leading to economic stimulation.
What Should Be the Focus?
If the government truly aims to boost the economy, the focus should be on policies that impact the largest number of people. Reducing GST rates, particularly on essential goods and services, will have a far greater trickle-down effect than raising the income tax exemption limit.
Moreover, indirect taxes like GST impact even those who do not earn enough to pay income tax. From daily wage laborers to salaried professionals, everyone feels the burden of high GST rates. By making essential goods and services more affordable, the government can ensure a real boost in consumption and economic activity.
While the move to increase the income tax exemption to ₹12 lakh may provide some relief to a small group of taxpayers, it is unlikely to have a major impact on the broader economy. Instead, reducing GST rates would be a more effective and inclusive measure to stimulate economic growth. Policymakers must recognize that in a country where direct taxpayers are a minority, indirect tax relief is a far more potent tool for boosting economic activity and improving the standard of living for all citizens.
Disclaimer
This article is for informational purposes only and represents the author's analysis and opinions. It does not constitute financial, tax, or legal advice. Readers are encouraged to conduct their own research and consult with professionals before making any financial or policy-related decisions.
