The countdown for Union Budget 2020-21 has already begun, with a lot of whispers and murmurs in corridors that the government may be looking at providing tax relief to individual taxpayers. The Budget shall be the the Finance Minister's second such exercise and expectations are already high in the salaried group of individuals for rationalisation of personal income tax rates. If the contemplations hold any truth, it would mean putting in that additional much needed money in the hands of individuals, thereby upping the purchasing power.
A quick look into the past highlights that in the last decade, the minimum amount not chargeable to tax has been raised from Rs 1.6 lakh to Rs 2.5 lakh, which is roughly an increase of 56 per cent. In the decade before that, the threshold was increased from Rs 50,000 to Rs 1.6 lakh, approximately 220 per cent. This clearly shows that policymakers have a fair bit of elbow room to please the individual taxpayer by tweaking the slabs.
Similarly, no major reductions have been seen in tax rates in the past few years other than the lowest slab rate standing at 5 per cent. On the contrary, for the financial year 2019-20, authorities increased the surcharge from 15 per cent to 37 per cent for individuals with income above Rs 2 crore. If that is to be compared with the last decade, the maximum tax rates applicable to an individual in the highest income slab have actually gone up from 30.90 per cent (FY2009-10) to 42.74 per cent (FY2019-20).
To add to the woes of the individual salaried taxpayer, policymakers have withdrawn the benefit of medical reimbursement and transport allowance by offsetting it with the re-introduction of standard deduction. However, the same was more of an eyewash, leaving a lot to be desired. Additionally, policymakers have negatively adjusted other areas of savings as well (by taxing the long term capital gains and limiting the offset of losses under the head house property against other heads to Rs 2 lakh). This has only added to the burden of tax on the individual taxpayer.
Furthermore, the relief under Section 80C of the Income Tax Act has also so far been muted. Section 80C is the core of the tax savings for all categories of individuals. The limit of deduction under Section 80C was last increased from Rs 1 lakh to Rs 1.5 lakh in the Budget of 2014.
Hence, rationalisation of slab rates is long overdue and is the need of the hour. In the past, Budgets have provided relief (via rebates) to individuals earning income up to Rs 5 lakh rendering their tax liability to nil. It is time that such category of individuals achieve a nil tax liability without resorting to any rebate if the minimum amount not chargeable to tax is increased to Rs 5 lakh. Also, there are expectations that the highest tax slab rate may be brought down from 30 per cent to 25 per cent with corresponding increase in the limit from Rs 10 lakh to Rs 20 lakh.
The effect of the revision of slabs and tax rates shall increase the disposable income in the hands of the common man, though the revised slab may still be nowhere near to what was proposed in the Direct Taxes Code (DTC).
Taxation, by and large, is the most important source of revenue collection in nearly all countries. Any favourable changes in tax rates may hit the government's coffers but may also have multiple benefits such as the offset of taxes through an increase in tax compliance, an increase in consumption/savings which in turn may provide an impetus to the economy, and an increase in indirect tax collections.
With expectations running high and the economy looking for the much needed boost, the current scenario would be an opportune moment to rationalise tax rates and provide a breather to taxpayers across categories.
(Divya Baweja is Partner with Deloitte India. Nitin Baijal is Director and Sahil Bhasin is Manager with Deloitte Haskins and Sells LLP.)
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