Union Budget 2025: Time ripe for a tax cut

The demand for lowering personal income taxes before a Union Budget isn’t unusual. But with India’s economy set to grow at its slowest in four years, experts feel it’s the right time to reduce the tax burden on the salaried class to boost consumption.

GDP growth is projected to dip to 6.4% in 2024-25, dropping below 7% for the first time in four years. Rural demand has fueled private consumption, but urban spending remains weak due to high interest rates and slower retail lending.

“In recent years, the government has adjusted tax slabs to help those in lower and higher brackets. Now, middle-income taxpayers earning ₹15–50 lakh deserve relief. This could balance tax revenue while encouraging spending,” said Aarti Raote, Partner at Deloitte India.

The need for tax cuts becomes pressing as government spending has slowed. Capital expenditure for the first eight months of FY25 dropped 12% to ₹5.1 lakh crore, raising concerns over meeting the record capex target of ₹11.11 lakh crore. Overall spending grew just 3.3%, the slowest in a decade.

Income tax collections, primarily from salaried individuals, have compensated for weak corporate tax growth, which declined slightly. Individual income tax revenues surged by 23.5% over eight months, highlighting the salaried class's heavy contribution.

Experts argue that reducing taxes for salaried individuals can revive urban consumption while keeping fiscal targets intact. “Urban demand is weak, and easing the tax burden could be the only way to boost spending,” said Madhavi Arora, Emkay Global’s Lead Economist.

The Confederation of Indian Industry (CII) also supports a tax cut to drive consumption, suggesting lower marginal rates for incomes up to ₹20 lakh while urging the government to aim for a fiscal deficit of 4.5% by FY26.

Boosting Urban Demand

Sandeep Sehgal, Tax Partner at AKM Global, believes tax cuts could increase disposable income, driving growth in sectors like FMCG, retail, and housing. “Such a move could be instrumental in reviving the economy,” Sehgal said.

Urban consumption indicators remain weak. Passenger vehicle sales and the Manufacturing PMI both show slowdowns, with manufacturing activity hitting a 12-month low in December. Inflation, especially food prices, remained high in 2024, further squeezing middle-class spending.

Harsh Bhuta, Partner at Bhuta Shah & Co., agrees that rational tax cuts could enhance disposable incomes, boost consumption, and promote savings and investment. However, he cautioned that these measures must align with fiscal stability goals. He stressed the importance of focusing on middle-income earners to drive consumption-driven growth.

Expectations from the Budget

While most experts agree on the importance of tax relief, they don’t expect significant reductions. “The government may opt for modest cuts under the new tax regime while managing fiscal constraints,” Arora said.

Suggestions range from a tax cut for those earning ₹10–15 lakh to increasing the standard deduction under the new regime. In the last Budget, the Finance Minister raised the standard deduction to ₹75,000 and adjusted tax slabs, allowing additional annual savings of ₹17,500 for many.

Old vs. New Tax Regime

Tax Slabs

The government has been pushing the new, exemption-free tax regime to replace the older system. However, experts feel some relief under the old regime could ease this transition. Raote noted, “Around 25% of taxpayers still use the old regime due to exemptions. A gradual shift with some benefits for them would help.”

Bhuta suggested a parallel approach to cater to taxpayers preferring the old regime’s savings incentives. Sehgal proposed introducing deductions like 80C and 80D into the new regime to make it more appealing.

Balancing reforms across both systems could support diverse taxpayer preferences while driving consumption and economic growth.