India Announces Major Tax Cuts for Growth

Source: The post India Announces Major Tax Cuts for Growth has been created, based on the article “TRUST IN THE TAXPAYER: Budget reinvigorates debate on whether taxes can encourage spending and growth” published in “Indian Express” on 12th February 2025

UPSC Syllabus Topic: GS Paper3- Economy-Indian Economy and issues relating to planning, mobilisation, of resources, growth, development and employment.

Context: The article discusses recent tax cuts in India. Incomes below ₹12 lakh are now tax-free, benefiting 83.52% of taxpayers. It examines whether this will boost spending and growth. The article also covers corporate tax reforms and upcoming changes in the Income Tax Act.

For detailed information on Tax Cut Boosts Spending and Economic Growth read this article here

Who Benefits from the New Tax Cuts?

1. Taxpayers with annual incomes below ₹12 lakh are exempt from paying income tax, affecting 83.52% of tax assesses.
2. Those earning above ₹12 lakh also see significant tax reductions, with an example showing a possible tax reduction of more than a third for incomes at ₹25 lakh.

What Effects Are Anticipated from the New Tax Cuts?

1. Higher Savings and Spending: Median taxpayers earn ₹5–5.5 lakh, and their monthly spending is ₹6,334 (urban) and ₹3,866 (rural). More disposable income could boost demand.
2. Potential Job Creation: Increased spending on goods and services may create jobs.
3. Mixed Investment Impact: Past corporate tax cuts did not sustain investment beyond a year.
4. Fiscal Cost: The tax cut costs ₹1 lakh crore but could raise future tax revenue if demand grows.
5. Alternative Approach: Revising indirect taxes might be more effective in increasing consumption.
6. Ease of Compliance: New tax reforms include simplified audits and rationalized tax rules for corporations.

What Further Tax Reforms Are Expected?

1. New Income Tax Act: The Finance Minister plans to introduce a new Income Tax Act, which will be half its current size and remove penal provisions.
2. Simplified Transfer Pricing Audits: A block audit system will be introduced, locking transfer pricing assessments for two years, reducing compliance burden.
3. Rationalization of TDS and Capital Gains Tax: The government will simplify TDS thresholds and capital gains tax calculations to improve compliance.
4. Focus on Ease of Business: Measures aim to prevent tax disputes and simplify operations for large corporations.
5. Impact on Growth: The changes seek to boost taxpayer trust, spending, and economic activity.

Question for practice:

Discuss how the recent tax cuts in India are expected to impact savings, spending, and economic growth.