Market Report

India Strategy – Personal income tax stimulus?

by Mahesh Nandurkar / Oct 19, 2019


A personal income tax cut in India could be accompanied by the removal of certain exemptions such as income tax exemptions to rich farmers, which could be a great reform. Income tax data provide some interesting takeaways, namely: 1) greater stress in the unorganised sector, 2) like-for-like salary income growth of at least 10%, 3) India’s middle income class growing 20% Cagr, and 4) salary earners growing 3m/year.

Possible 5-10ppt income tax rate cut for middle-income class
The government’s large corporate tax cut and no significant pickup in the economy yet have driven hopes that personal income tax rates may be reduced to stimulate consumption and improve sentiment. Tax relief could be directed at the middle income segment.

Funding challenges
Modi’s ‘wealth creators deserve respect’ statement and corporate tax cuts point to the likelihood of tax cuts at the top-end. However, incentive rationalisation could make tax cuts’ impact on the top tier tax-neutral. Incentive rationalisations could include some curtailment of EPFO benefits (attempted earlier but withdrawn) and income taxes on rich farmers. The popular ‘80C’ benefits (linked to provident funds, insurance, etc) are estimated to cost Rs750bn in FY19 but any tinkering here appears unlikely.

Potential beneficiaries
Our base case remains that a large personal income tax cut is unlikely in the current fiscal year. But if the government decides to go ahead with the cuts, discretionary consumption would be the biggest gainer.