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Lower tax rates: A mixed bag for savings, consumption

The government has offered a lower income tax regime in order to generate consumption and demand in the wake of slow economic growth. Marginal impact on savings likely as the forced incentive to save won’t be there, say experts.

, ET Bureau|
Last Updated: Feb 02, 2020, 09.30 AM IST
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Marginal impact on savings likely as the forced incentive to save won’t be there, say experts.
NEW DELHI: A proposal of taxation at lower tax rates without exemptions will have a mixed effect on savings and consumption, economists said, adding it was too early to quantify the impact.

India’s gross savings for 2018-19 is estimated at 29.7% against 32% for 2017-18. The country’s household savings have been stagnant at 17.1% of the gross domestic product (GDP) in 2016-17 and 2017-18.

“While people may not shift to the new scheme immediately, there may be a marginal impact on savings as the forced incentive to save will no longer be there,” said Upasna Bhardwaj, economist at Kotak Mahindra Bank.

New income tax slabs and reduced the tax rate for different slabs provided the taxpayer foregoes all the existing exemptions or deductions have been proposed in the Union Budget for 2020-21. The scheme will optional and the existing rates and slabs will continue. A person with an annual income of Rs 5-7.5 lakh can pay a lower tax rate of 10%; Rs 7.5-10 lakh of 15%; Rs 10-12.5 lakh at 20%; Rs 12.5-15 lakh at 25%; and above Rs 15 lakh a 30% tax will be applied sans any exemptions and deduction.

Bhardwaj added that people at the bottom end of the tax spectrum could opt for the lowered tax rate as they do not exhaust the exemptions fully. “So, it might be a positive for consumption,” she said.

The government has offered a lower tax regime in order to generate consumption and demand in the wake of slow economic growth.

“In the absence of a social security measure, a rational consumer should and will continue to save,” another economist said, requesting anonymity.
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