India: Analysing the fiscal impact of income tax cuts – Standard Chartered Bank

Economist at Standard Chartered Bank offered their take on the fiscal impact of an expected personal income tax cut – aimed at boosting consumption demand – by the Indian government.

Key Quotes:

“The market has shifted its focus to the budget presentation in early February, after the Monetary Policy Committee (MPC) surprised in December by not delivering a rate cut. A personal income tax cut aimed at boosting consumption demand is widely expected in the Union Budget for FY21 (year starting April 2020). The Direct Tax Code (DTC) recommendation committee has reportedly suggested a framework to simplify the tax framework by lowering individual income tax rates and phasing out various exemptions (such as housing rent allowances).”

“Lower income taxes could provide a short-term boost to consumption and growth, but fiscal space is constrained. We estimate the FY20 fiscal deficit at 3.8% of GDP – wider than the budgeted 3.3%. The fiscal deficit is clearly under pressure, and the government is looking to plug revenue gaps. The central government has asked states to improve indirect tax collection via increases in GST rates, which will be up for consideration at the next GST Council meeting on 18 December. We think an increase in the 5% GST rate and/or higher GST ‘Compensation Cess’ rates on some items (such as cigarettes) is likely.”