The Impact of Abolishing Income Tax for Earnings Below 5 Lakh in India

On August 1, 2023, the Indian government announced a significant change in the income tax regime, raising the income limit for claiming the benefit under Section 87A to 5 lakhs (500,000 INR) from the earlier 3.5 lakhs (350,000 INR). This decision has garnered considerable attention and debate. This article explores the potential consequences of this move from multiple perspectives, including common people, the government, and the overall economy.

Consequences from Different Viewpoints

Common People

The primary beneficiary of this change is the common person. Previously, those earning up to 5 lakhs would receive a rebate under Section 87A, which would reduce their tax liability to zero. With the new rule, those earning up to 5 lakhs will receive a full rebate, meaning no tax liability at all. This translates to more disposable income in their hands, which can be utilized for personal spending and covering daily expenses.

As a result, the total income reported in tax returns is expected to rise sharply. This increased reported income, when subjected to GST (Goods and Services Tax) in the formal economy, will result in higher indirect tax collection. The common wisdom among economists suggests that this move will not lead to a significant economic downturn. While some may argue that it results in a revenue loss of approximately 4700 crore INR annually, the government believes that the initiative will gain popularity during election periods and eventually lead to greater economic stability and growth.

Government

From a government perspective, there are mixed signals. On one hand, revenue from direct taxes will see a 4700 crore INR loss annually. This loss may discourage some taxpayers from filing returns or paying their taxes. However, the government has expressed confidence that the increase in indirect tax collections (GST) will offset this loss.

In addition, utilizing the popular support garnered from this move, the government aims to formalize the economy. This will lead to an increase in direct and indirect tax collections, including higher GST revenue. Moreover, there's a belief that this policy will help in reducing the tax burden on the income tax department, which has been expanding to cope with the increasing number of taxpayers.

Conclusion

In summary, the government's decision to raise the income limit for the full rebate under Section 87A to 5 lakhs is a strategic move aimed at boosting public support and economic stability. While short-term revenue loss is expected, the long-term benefits may outweigh the costs. The mechanism of GST implementation is designed to ensure that the overall tax collection remains balanced.

Key Points

1. **Income Tax Reduction**: Those earning up to 5 lakhs will receive full tax rebate, meaning no tax liability.

2. **Tax Slab**: Earnings above 5 lakhs are taxable at existing slabs: 5%, 20%, and 30%.

3. **Increased Indirect Tax**: Expected rise in GST revenues once more people report their full income.

4. **Revenue Loss**: Estimated 4700 crore INR loss in direct tax revenue but compensated by increased indirect tax collections.

Note: The views expressed are personal and based on information from print and electronic media. The exact impact may vary based on various factors.