Ahead of the Budget presentation on February 1, expectations are building up that Finance Minister Arun Jaitley will offer an income tax relief to both individual taxpayers and corporate India. More money in the hands of consumers will help in spurring demand which has been hit due to demonetisation.
The finance minister has already spoken about the need for lower taxes in India. "What you need is a broader base of economy for which you need a lower level of taxation. You need to manufacture products and provide services which are more competitive in character and therefore your taxes have to be globally compatible," Mr Jaitley said.
The government could announce an income tax relief in the Budget "to create a feel good factor", said Manoj Nagpal, CEO of Outlook Asia Capital.
"There is an expectation that the Budget will move towards a lower tax regime, either in the form of lower tax rates or increasing the exemption limits. We believe that lower tax rates are a better form of passing the benefits rather than increasing the tax slabs," Mr Nagpal added.
Sandeep Sehgal, director for tax and regulatory at Ashok Maheshwary & Associates LLP, said the note ban will help the government increase its tax revenues as it will bring a large swathe of economy under the tax net. "It is anticipated that the government will have some cushion available to reduce the taxes and honest taxpayers could be rewarded with some increase in basic exemption limit. Accordingly, upward shuffling in tax slabs to reduce the overall tax liability also cannot be ruled out," he added.
Rahul Garg, direct tax leader at PwC, said it is not a "great idea" to lower the income tax exemption limit as a lot of taxpayers go out of the tax net. Instead, the tax rate should be lowered or the range of the tax bracket be increased, he added.
Mr Garg said the tax bands could be increased by Rs 50,000 in the upcoming Budget. According to the current income tax laws, income up to Rs 2.5 lakh is not taxed. Income between Rs 2.5 lakh and Rs 5 lakh is taxed at 10 per cent; between Rs 5 lakh and Rs 10 lakh at 20 per cent, and beyond Rs 10 lakh at 30 per cent.
IDFC chief economist Indranil Pan said that the government could also provide higher income tax exemptions on housing loans to boost the property sector.
On corporate tax, Mr Garg of PwC said he believes that the government could lay down a roadmap for reduction of corporate tax rate from the current level of 30 per cent to 25 per cent. The finance minister had in the Budget for 2015-16 announced a plan to lower the corporate tax rate from the existing 30 per cent to 25 per cent over a timeframe of four years along with withdrawal of exemptions.
Mr Garg also believes the government could reduce corporate tax rate by 1 percentage point to 29 per cent in the February 1 Budget.