Budget 2025: Why the government is reluctant to reduce personal income tax

The new tax regime offers lower tax rates for forgoing various deductions and rebates for interest paid on housing loans

The NDA government led by Prime Minister Narendra Modi has not made any major changes to the personal income tax laws since it took office in May 2014, much to the disappointment of many taxpayers. However, it did introduce a new simplified tax regime and for those staying with the old tax regime, it halved the rate to 5% for the lowest tax slabs.

Personal income tax provides significant and steady revenues to the government. Its collection exceeds the government's revenues from taxes on the profits of corporations.(PTI)

The new tax regime offers lower tax rates for forgoing various deductions and rebates for interest paid on housing loans, investment in social security instruments and expenses on child education.

Personal income tax provides significant and steady revenues to the government. Its collection exceeds the government's revenues from taxes on the profits of corporations. However, every tax rebate, deduction, and revision of income subject to tax leads to revenue losses for the government.

So, can the common man complain about getting a raw deal from the government? Should the government have given more concessions to ordinary folks?

It all depends on who is defined as a common man. Ideally, an individual with an annual income of up to ₹10-12 lakh fits that description.

Offsetting inflation impact

Advisor to Assocham’s National Council on Direct Tax Rahul Garg who was previously with a Big 4 auditing and consulting firm explains the income tax rates need to be changed if the common man is under stress because of the income tax. He pointed out that additional rebates announced in the last budget for the salaried opting for the new tax regime had made incomes of up to ₹7 lakh tax-free. Essentially, those at the bottom of the tax pyramid have got relief over the years rather than being burdened.

One argument for the upward revision of the threshold of income exempt from taxes is to offset the impact of inflation. Significantly, core inflation – inflation excluding the rise in prices of food and energy – has been mostly under control so far. Food inflation has been problematic and has burdened a section of the taxpayers. But a disproportionately larger impact of food (especially vegetables) inflation is felt by those outside the tax net.

Ease of compliance

While low tax rates are important, for many individuals, particularly entrepreneurs who run small businesses and start-ups, compliance with tax laws is a bigger burden than the tax rate. They have to comply with multiple sections of the income tax law and other tax and commercial laws and maintain records. Mr Garg said their burden can be eased with a presumptive tax regime, where taxes have to be paid on a specified percentage of income.

Benefits in return for taxes

The government uses tax revenues to provide citizens with various benefits in form of infrastructure and subsidised food, education and healthcare. Tax revenues are also used for redistribution of resources to poorer sections of the society. The benefits received by citizens are far more than the cumulative income tax paid by all taxpayers, Garg pointed out. The flow of benefits can become more effective if leakages are plugged.

The government needs to redistribute resources to narrow the disparity in society, provide various social services and build infrastructure. Income tax revenues are one of the significant sources of resources for these expenditures, and most of it is paid by those earning above ₹10 lakh. This makes the government reluctant to cut income taxes or make any "big bang" announcements other than simplification of the law.