Significant Tax Cuts for Middle Class
The Union Budget 2025 introduces the largest tax cuts for the middle class in India’s history.
For incomes between ₹7-₹12 lakh, taxpayers now get a full tax rebate, which was previously available only for those earning below ₹7 lakh.
The exemption limit for those earning above ₹12 lakh has increased from ₹3 lakh to ₹4 lakh, alongside favorable changes in tax slabs and marginal tax rates.
These cuts are expected to reduce tax revenue by ₹1 lakh crore, around 8% of the total income tax collection.
Implications of Tax Rebate on Revenue
Despite the tax cuts, the Budget anticipates a 14% increase in direct tax collection, requiring a 24% rise in taxpayers' income.
Optimistic Scenario: Growth in the number of high-income earners or significant income increases could drive tax buoyancy, benefiting upper-income groups and potentially leading to upward mobility.
Pessimistic Scenario: If tax buoyancy fails, government revenue will fall, impacting the poor and disadvantaged, and causing potential cuts in public expenditure due to strict fiscal targets.
Impact of Fiscal Consolidation
The government is committed to reducing its fiscal deficit, with a target of 4.4% in 2025-26, down from 4.8% in 2024.
This has led to cuts in government spending across several sectors, including flagship schemes.
Fiscal contraction may hurt economic growth, as reduced government spending limits the stimulus needed to revive the economy, leaving exports and corporate investment as key growth drivers.
Challenges of the Budget Strategy
The heavy reliance on income tax cuts to stimulate growth may not be effective if corporate investment and exports do not pick up.
The government is betting on a cycle where increased tax rebates lead to higher consumption and, eventually, more investment, but this is a high-risk strategy with uncertain outcomes.
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