From streamlining GST to lowering personal income tax: How govt plans to boost economy

The government is working on multiple measures to revive the ailing economy after growth in the second quarter dipped to 4.5 per cent, the lowest in over six years.

Finance Minister Nirmala Sitharaman on Saturday said the government is working on steps like personal income tax rationalisation and another reform in GST to boost demand and economic growth.

While government has already announced a slew of measures including a 22 per cent cut in corporate tax to boost economy, its effects are yet to have any impact on GDP growth.

In fact, growth is expected to slow down further in the third quarter of 2019-20 as core sector activity continues to remain subdued.

Speaking at the HT Leadership Summit in New Delhi, Sitharaman, who recently came under fire over her reply on rising onion prices, said public sector banks disbursed nearly Rs 5 lakh crore (Rs 4.91 crore to be exact) in the second quarter of 2019-20 to increase lending activity, especially in the country’s rural belts.

The finance ministry had earlier asked banks to organise loan melas to boost credit flow. A large number of people from rural areas secured low-security loans after around 400 loan melas were arranged by different public sector banks over the last month.

Even though there is no guarantee whether such loans will help boost consumption, there is doubt among economists on recovery of these loans. The government, on the other hand, is confident that more credit flow to consumers will ultimately lead to a boost in consumption.

“So there are ways for giving a stimulus for consumption. We are adopting a direct method and also the method through which we are spending on infrastructure, whose spillover can go to core industries labour and so on,” Nirmala Sitharaman said.


One of the key reforms the government is working on is rationalisation of personal income tax rates, said the finance minister.

Sitharaman said rationalisation of personal income tax is “one among many things that the government is working on” in a bid to put money in the hands of people.

The demand for rationalising income tax found more support after the government decided to slash corporate tax to boost consumption.

A reduction in personal income tax will hit government’s revenue collection initially, but the move would also provide citizens with more room to spend. However, economists including the likes of Raghuram Rajan feel that an immediate permanent tax cut would cause more harm than good.

“Given scarce resources, India should not jump immediately to a permanent tax cut for the urban middle class to boost consumer demand. Instead, while growth-boosting reforms are being put in place, scarce fiscal resources are perhaps best targeted toward supporting the rural poor,” Rajan has said.

But the government, facing severe criticism over its economic record, may simplify the taxation system including removal of exemption in the hope of boosting consumption.

Sitharaman cited the example of corporate tax and said, “From now on, they’re moving towards a greater simplified and exemption free. Therefore, has harassment-free therefore subjective interpretation free taxation regime.”
While the finance minister did not announce when fresh tax measures will be introduced, it is likely that all such decision may be announced in the upcoming Union Budget 2020-21.


Another move the government is looking at is streamlining GST rate structure, declared Nirmala Sitharaman.
The finance minister said the rates will have to be eventually rationalised and added that the entire tax system has to be simplified. Sitharaman added that the original intent was to have a three-slab GST.

Though all the decisions related to GST slabs and rates are taken by the GST Council, Sitharaman’s statement gives a fair indication about the government’s intent to streamline GST rates.

In fact, a decision on this front could be announced sooner than the Union Budget as the current rate of taxation is leading to complications, stated Nirmala Sitharaman.

“One, the tax per se, is getting complicated because of this unstructured bringing down of rates. Another, it’s also getting complicated because you want to be sure that you’re doing everything correct, but ending up asking for so much more information in a technology-driven system,” she said.

As of now, there are four tax slabs in GST structure – 5 per cent, 12 per cent, 18 per cent and 28 per cent – excluding the exempted items that fall under 0 per cent.

All eyes will be on the GST Council which will meet later this month to discuss ways to improve revenue. While the GST Council has been largely focused on cutting rates for a host of items, the fourthcoming meeting is expected to focus on bringing some exempted items back under taxation.

Sources told news agency IANS that GST on several finished products may also see an increase as Centre is also looking to correct the inverted duty structure where inputs and raw material attract higher duty than finished products.

A recently released RBI report indicated that the effective GST rate in India has come down to 11.6 per cent from 14 per cent in May 2017, resulting in a reduction in government’s revenue to the tune of Rs two lakh crore. This is one of the key reasons which has led to a delay in compensating states.


Nirmala Sitharaman also said that there is an urgent need to “bring credibility back to data”. Her statement comes after several official reports on economic indicators were junked by the government on the basis of reliability.

Many economists including former Reserve Bank of India governor Raghuram Rajan has criticised the government over lack of available data on key economic indicators.

Sitharaman, however, assured that the government is working to make sure that any kind of inappropriate methodology to calculate economic data will be addressed gradually.

“So we will have to work towards better credibility, we have to work towards making available data without any obstruction,” Nirmala Sitharaman said.