The government is weighing the impact of a proposed cut in personal income tax rates because the fiscal space is limited for a significant cut despite its potential to spur economic growth, possibly upsetting widely-held hopes of such an action in the February budget.

The government has been discussing trimming income tax rates so that more money passes onto people's hands and revives demand.

Many analysts and some economists have been pressing the government to cut personal income tax rates to spur demand and lift economic growth, which sank to a six-year low of 4.5 percent in the July-September quarter from 7 percent a year ago.

Now the government is favouring higher spending on rural schemes over reducing personal income tax because it believes that would have a far bigger impact on boosting the economy, said a senior official involved in budget discussions. He did not want to be named.

"The actual option, thus available is whether a relief extended to these 1.5 crore will help boost consumption or any relief given in the hands of poor by the expansion of rural schemes will help to revive consumption in the economy," another official added, requesting anonymity.

The government has been struggling with the fiscal deficit as tax revenue collection has remained weak and some estimates suggest a shortfall of over 2 trillion rupees in collections in 2019-20.

What may have finally prompted the government’s reason on the matter would the tax statistics. Of the more than 6 crore taxpayers, at least 4 crore file nil returns.

Yet, the government might still go ahead with giving income tax relief, but it will be only tinkering with the rates rather than a “major” cut, said the official.

Several economists, the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) have suggested a hike in rural spending is better than a cut in personal income tax to revive the Indian economy.

"Several schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme, Pradhan Mantri Gram Sadak Yojana (PMGSY), PM KISAN, increased benefits for unorganised labour's etc will continue to be budget priorities," the second official quoted above said.

First Published:Jan 4, 2020 12:52 PM IST