Indian Government Reduces Taxes for Lowest Slab to 5 Percent

Indian Government Reduces Taxes for Lowest Slab to 5 Percent

The current Indian government has been in the news after the Prime Minister launched currency demonetization on November 8 last year. The step was considered as bold by many while economist all over the world termed it as an immature decision for a developing economy. The current government tackled all the criticism and Prime Minister Narendra Modi said that his government will continue with its fight against shadow economy. The country is planning to move to digital transactions and higher accountability. People in India were concerned about the upcoming Budget which promises to be forward-looking budget with emphasis on giving sops to taxpayers and small businessmen.

While Modi’s decision on demonetization has been criticized and many people opposing him have even termed it as a failed move, the current budget has some positive news for the fastest growing major economy. Our focus on India will continue as we track the developing Asian economy and its stock market.

The Indian budget has offer major relief to all tax payers in the lowest slab for taxes. Instead of earlier rate of 10 percent tax, the tax for next year will be 5 percent only. Additionally, for small businesses generating up to $10 million per year, the tax rate has been reduced from 30 percent to 25 percent. This segment accounts for nearly 96 percent of current businesses in India. Economist see this as a major positive move in the current budget.

The government has announced about taking steps for agriculture sector, banking sector, manufacturing but has not given any specifics. For the first time, the budget for Indian Railways was combined with General Budget for India.

India is moving towards accountability. The country suffers revenue loss due to lower compliance in taxes. Instead of improving its tax system, the governments have been earning more from Indirect taxes. Among major taxes in India includes heavy taxes on petrol and diesel. Many economists have suggested that India should reduce tax percentage and improve compliance among business owners.

In the United States, President Donald Trump has promised voters about tax reductions to make the country attractive for businesses. The governments in all major economies should consider reduction in tax rates and higher compliance for taxes as a major step in moving towards better system of taxation. Honest taxpayers should not feel bad about few people fooling the tax system. Big corporations have been doing many dodgy transactions to avoid taxes. Many companies have setup their headquarters in Ireland in order to save money as the current corporate tax in Ireland is low compared to rest of Europe.

There were talks of taxing long term capital gains in stock markets in India, a decision that had spooked investors. However, the Finance Minister refrained from making any changes in long term capital gains tax. This led to major gains for Indian stocks after the budget speech finished.

Overall, economists count Indian budget as a positive step in the right direction. India’s growth will depend on how the leadership in the country promotes small businesses to offer jobs for working class in the country. And, it would be better for the governments to understand the importance of taking the right action for promotion of small business.

Talking about Budget, Jimeet Modi of Samco Securities said, “Budget is forward looking with simplistic orientation to invigorate the economy by focusing on ease of doing business, lower fiscal deficit targets thereby creating room for lower interest rate regime, increasing disposal income in the hands of middle class by lowering direct tax incidences, encouraging honesty by capping cash transactions either in the form of expanses or donations. There are fine prints which will adversely or positively affect some sector or the other, but on the whole, this is a credible budget to curb the menace of black money and at the same time has made the life easy for honest men and women in the country. The budget is good for the country and the market.”

Ms Chanda Kochhar, MD and CEO, ICICI Bank said, “The Union Budget has achieved the right balance between providing a growth impetus and maintaining fiscal prudence. It has comprehensively addressed all areas of socio-economic priority: farmers, poor & under-privileged sections of society, infrastructure development and strengthening of the financial sector. The Finance Minister has rightly prioritized investment in infrastructure and the rural economy, with a focus on inclusive growth and capacity building.”

Mr. Mustafa Nadeem, CEO, Epic Research said, “Budget has been given thumbs up by markets and corporate. It is budget for Gramin and lower middle class which forms majority of India. There is lot to cheers about this budget with some disappointments but overall direction is clear and if implemented will give major boost to spending and shaping up of rural economy. The fiscal deficit target of 3.2% of GDP is very welcoming but is hard to maintain and may be extended at later stage.”

Inputs for this story have been provided by our Indian correspondent Karan Sharma.

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