Nirmala Sitharaman hinted at reform in personal income tax, speculation is rife that the government will cut income-tax rates in the coming Budget. This would be ill-timed, given the huge shortfall in revenues after the steep cut in corporate tax that would take a while to work throughthesystem. Till January 15, direct tax collections fell by about 5% (year on year). Giving in to the demand, largely from the middle class, will weaken the government’s resolve on fiscal discipline, with minimal, if any, impact on demand and growth . The focus must be to raise more revenues through better implementation and effective use of the goods and services tax (GST), and more than make good the Rs 1.45 lakh crore giveaway in corporate taxes. In the medium term, as revenues rise, income-tax rates can be lowered, with the present rates kicking in at higher thresholds of income. This should be accompanied by structural reform to taxation of savings that would nudge people to save intelligently, bring efficiency in the tax system and encourage investment and growth. India’s maximum marginal rate (MMR) of tax of 85% in 1973-74 — spread over seven tax slabs — was brought down to 30% in 1997-98, and slabs compressed to three. The MMR has not been changed since then, though the surcharge has been tinkered with over the years. The exemption limit now is Rs 2.5 lakh. Plus, there is a rebate for income between Rs 2.5 lakh and rs 5 lakh that brings tax liability up to Rs 5 lakh to zero. But if there is any income above Rs 5 lakh, say, the income is Rs 5,00,100, the tax liability would be Rs 12,520, 5% of the income between Rs 2.5 lakh and Rs 5 lakh, and 20% of Rs 100. A maximum 30% rate is charged on income above Rs 10 lakh. Also, the hike in the surcharge in this year’s Budget has pushed up the effective income-tax rate on income above `5 crore to about 42.7%. That’s way too steep. The task force to re-write the income tax law, steered by former CBDT member Akhilesh Ranjan, is reported to have recommended scrapping the surcharge. This is welcome, given that surcharges are meant to be only temporary levies and the revenues are not shared with states. However, the panel’s suggestion to have five slabs and an MMR of 35% for incomes above Rs 2 crore is not a good idea. Restricting the number of slabs to three reduces ‘bracket creep’, in which inflation pushes taxpayer into a higher tax bracket without any rise in real income. .