Will Income tax rate cut increase Demand?

Is Budget 2020 a middle-class budget?

Finance minister Nirmala Sitharaman unveiled the budget for the financial year 2020-21 by Feb 1. The theme of the budget is observed as Aspirational India, Economic Development and Caring Society.

Income tax rate cuts

The tax rates were reduced for the various income slabs. The tax reduction is seen as a scheme that the taxpayer should opt for ie., The new tax rates are for the taxpayers who do not claim any tax exemptions like leave travel allowances, House rent allowances, House loan repayments, Savings such as LIC, PPF etc. Those who claim for exemptions should stick to the older tax rates and new tax rates do not apply for them.

The objective of the tax rate cut is to reduce the tax burden and to put more money in the hands of the people to increase the consumer demand in the economy.

Nistaar has been saying in previous articles that more money should be given in the hands of the people to increase consumer demand by which the economy would revive. And govt has taken steps for it by reducing the tax rates.

But is it right to reduce the tax rate to increase demand? Many economists say that the new tax scheme is not attractive for salaried taxpayers and those who opted for exemptions already.

Most of the Indian salaried employees are not capable of spending lavishly and they tend to save money or take loans and repay them through salary. For eg. Either People take house loans, car loans etc. and repay them as monthly EMI or they save money through chits or otherwise for their later expenses. Those who have taken loans can claim the exemption to pay tax as he/she has debt/loan to repay. Most of the salaried employees either take loans or show expenses like house rent, educational expenses etc. to claim exemptions to pay tax.

Those who already took loans and claiming exemptions cannot opt for the new tax scheme. And for the salaried income taxpayers, the new scheme is not attractive compared to the old. Then to whom this new scheme is for? For those who work in the unorganised sector, MSME?

Will the new scheme adversely affects demand?

The new scheme obstructs the taxpayers to take loans as they couldn't claim exemption. This prohibits the people to take house loans, car loans etc. This may affect the construction sector, automobile sector etc. adversely and affect the growth. The construction sector is very large and important in terms of employment and growth in the country. Affecting the sector would adversely affect the income of labours, contractors etc. relying on the sector. Then how the objective of giving more money in the hands of people to increase demand is possible?

People saving money through LIC, PPF would be reduced so that money going to these organisations reduce and they don't get profit out of it.

I suspect this tax rate cuts are only for eyewash as no taxpayer would opt for the new scheme if he had already taken loans. Moreover, the scheme is very complicated to understand and it is a burden for the taxpayers.

Also, the funds allocated to the MGNREGA scheme is reduced. This increases the burden on the states and MGNREGA being a saviour of poor people getting affected is not a good sign. Govt has increased the public spending to boost the growth in the economy, we will see how much it helps in employment and growth. Also, govt has announced disinvestment of Air India, LIC to get money for the expenses.