Only Half of Foregone Income Tax Revenues Will Boost Consumption

Chennai: The revision of income tax exemption rates in the new regime and the interest rate cut by RBI is aimed at improving the flagging urban spending. However, the new tax rates will benefit only 5 per cent of the population in the upper income strata. Hence, only half of the revenues foregone by the government by the revision will boost consumption.

The income tax rebate under the new tax regime has been raised to Rs 12 lakh per annum from Rs 7 lakh along with a reduction in tax slabs across the higher income groups till Rs 24 lakh. According to the government, this has led to about Rs 1 lakh crore loss in revenue for the government and this is expected to boost consumption demand in urban areas.

However, India ratings finds that this exemption will benefit largely the top 5 per cent of the population. This group’s propensity to consume is less compared to lower income strata. Their spending is largely skewed towards high-end goods and hence limit the consumption of regular products and essentials. Some of the large corporations will stand to benefit from their consumption.

Further, such households would either be focusing more on easing their liabilities or to increase buffers for future consumption through higher savings.

Hence, India ratings estimates that the Indian household’s additional consumption will roughly be 50 per cent of the additional income generated.

Despite the exemption, income tax at 4 per cent of GDP would be the highest contributor to gross tax revenue in FY26. This remains in contrast to the situation prior to the pandemic in FY20 when goods and services tax (GST) remained the highest contributor to gross tax revenue. This suggests that the overall tax system has been gradually turning progressive and the income prospects are better for upper income strata.