Budget 2020: Why An Income Tax Rate Cut Is Unlikely?

Recently, there were reports that the government is to cut expenditure, as the fiscal deficit is likely to slip a great deal. Such a piece of news is not great news, as it signals that the government has spending constraints.

As economic growth rate falters, revenue of the government has been hit, which is why a cut in expenditure.

To compound the problem, rising crude prices, are likely to inflate the fuel subsidy bill. Tensions in the Middle East are unlikely to go away anytime soon, which should result in the subsidy bill swelling for LPG and Kerosene.

It's worth mentioning here that the government cut corporate tax rates in order to boost economic development, which has led to a revenue loss of Rs 1.4 lakh crores. It might not be able to immediately cut income tax rates, as the fiscal deficit could worsen.

There are arguments that the cut in income tax rates, would lead to spending power by income tax assesses, which in turn could lead to economic growth. While this could be a long-term strategy, the immediate worry is a revenue loss.

Thus, the problems right now are simply numerous, including slowing economic growth, revenue losses due to corporate tax cut, fuel subsidy bill elevated on account of rising crude prices etc. Apart from this, a higher fiscal deficit would be viewed negatively by the rating agencies, who might even consider a sovereign rating cut. This could be bad, as it could lead to capital outflows, which would make the government a little more cautious.

Hence, our guess and that is a guess is that there could be no income tax cuts in the Budget 2020.

In fact, it makes sense for the government to dole out cash schemes to the poor, in place of an income tax cut, as these are the people who would go out and spend, with money in their hands.

Fiscal deficit maybe upwards of 3.5%

In all probability the government is likely to see a fiscal deficit that is to be in excess of 3.5 per cent of GDP and some analysts place the number at 3.8 per cent. This is one number that stock market observers and analysts alike would monitor closely.

Things look highly volatile on the Middle East front and if things look bad ahead of the finalization of the Budget papers, it would be very brave for the Finance Minister to cut income tax rates. It's best to tone down expectations.

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