India Slashes Income Tax Rates From 10% To 5% For Lowest Bracket 1

Focus on rural India

The government of India presented its annual Union Budget for 2017-18 on February 1, 2017. There were quite a few changes in the budget that were in stark contrast to previous years.

The Railway Budget, usually presented separately a couple of days before the Union Budget, was integrated with the latter. The date of presentation of the budget was advanced from the final week of February to the first day in order to give ministries time to start implementation from the first day of the new financial year which, in India, begins on April 1.

For the second successive year, the focus remained firmly and clearly on rural India. With generous sops to the rural segment of the country, including farmers, and rural-oriented schemes, Prime Minister attempted, once again, to shed his image of the leader of the elite and don that of the leader of the masses.

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Interestingly, with elections looming in five states, the biggest and most important one being in Uttar Pradesh, the government stayed away from populist announcements and stuck to its broad-based growth agenda.

Consumption expected to rise

With the mass population being negatively impacted by the demonetization announced in November 2016, another major step by the government was related to a cut in income tax rates for the lowest segment of tax payers.

Individuals with annual income from INR 250,000 to 500,000 (or $3,750 to $7,500) have seen the tax rate halved from 10% to 5%. Tax rates for other brackets remain the same. But in order to make-up for this tax cut for the lowest segment, the government has introduced a surcharge of 10% on the income tax liability for individuals with annual income between INR 5,000,000 to 10,000,000 (or $75,000 to $150,000). A surcharge of 15% of the tax liability for individuals earning over $150,000 annually will continue.

This tax cut for lower to middle income groups is expected to soothe frayed nerves of segments which were possibly hit the hardest due to demonetization. Also, this leaves more income in the hands of individuals to spend. If translated into consumption (INCO), this spending will also support economic output at a time when growth is expected to have been negatively impacted by demonetization.

Apart from the income tax cut, the government made important announcements for both foreign and domestic investors. Let’s look at those in the next article.

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