NEW DELHI: Finance Minister Nirmala Sitharaman’s Budget 2024 has once again placed income tax (IT) reforms at the centre of economic discourse.
The government’s move to enhance tax exemptions and promote the new tax regime is being pitched as a “masterstroke” aimed at increasing disposable incomes, driving consumption, and simplifying compliance.
But will it truly work its magic, or are there cracks in the strategy?
One of the most significant announcements was the further rationalisation of the new tax regime, which now offers a higher basic exemption limit and extended rebates.
The government has been actively nudging taxpayers towards this system, arguing that it removes cumbersome deductions and paperwork, making compliance easier.
However, adoption has remained slow, as many taxpayers – particularly salaried individuals – still find value in the old regime’s deductions for housing loans, provident funds, and insurance premiums.
Other exemptions
Beyond personal income tax, the budget has also continued certain exemptions that benefit businesses and high-net-worth individuals.
Startups and new manufacturing units, for instance, have received extended tax holidays, which the government hopes will spur investment and job creation.
While this has been welcomed by industry leaders, critics argue that the tax benefits disproportionately favour capital over labour, with limited direct relief for the middle class.
Another controversial aspect is the continued exemption of agricultural income from taxation. While this policy is intended to support farmers, economists point out that it is often exploited by large landowners and corporate entities to avoid taxes.
With the government pushing for fiscal consolidation, critics question whether such blanket exemptions should still exist.
The revenue impact of these measures remains a key concern. Reducing direct tax collections through exemptions and lower rates may put pressure on government finances at a time when fiscal discipline is critical. While the government expects increased compliance and indirect tax collections to offset potential shortfalls, skeptics warn that the strategy could backfire if growth remains sluggish.
New income tax regime
On the flip side, the government argues that a simpler, lower-tax regime will encourage more individuals to declare their incomes, thereby expanding the tax base.
By increasing disposable incomes, it also expects higher consumer spending, which could indirectly boost tax revenues through GST collections and economic expansion.
The success of Sitharaman’s IT reforms will ultimately depend on execution. If the new tax regime gains traction and compliance improves, it could indeed prove to be a masterstroke.
But if taxpayers remain reluctant to switch, and if revenue pressures mount, the government may have to rethink its strategy in the coming years.
