Reforming personal income tax – The Financial Express
Replace the six-slab tax structure with a new three-slab structure with no deductions or exemptions except for insurance premiums and donations
By TV Mohandas Pai & S Krishnan
The income tax law in India has become complicated, thanks to the government granting one or the other tax benefit or concession. Now is the time to simplify personal taxation, as was done in FY 2006 when the then FM doubled the basic exemption limit from Rs 50,000 to Rs 1 lakh, and tax at the basic rate of 10% was payable on income between Rs 1 lakh and Rs 1.5 lakh, with only three slabs and a maximum tax rate of 30%. This led to an upsurge in tax compliance and collection in subsequent years.
No significant rate reductions have been made in India over the past few years except for the 5% reduction on the first tax bracket of FY18. The maximum individual basic tax rate in India is now 30% and the effective tax rate is 42.74% for those earning more than Rs 5,000,000 per year after taking into account a 37% surcharge and a health and education tax of 4 %. In comparison, the global and Asian averages in 2021 are 31.27% and 28.38% respectively.
The 2020 Finance Act introduced a new optional tax regime for individuals, and HUF taxpayers must pay income tax at lower rates from FY21. The new six-bracket regime (from 5% to 30%) has widened the tax bracket, and the top tax rate of 30% is applied on income above 15 lakh. The prevailing tax regime had three tax brackets, and the highest rate of 30% was applied on income above Rs 10 lakh. However, if individuals and HUF taxpayers choose to file their tax returns under the new regime, they will not be able to claim approximately 70 tax deductions and exemptions such as HRA, LTA, payment of life insurance premiums, refund of principal amount of a home loan, interest payment on a home loan for self-contained property, health or medical insurance premium deduction, donations under Section 80G, etc. The elderly will not be able to claim the deduction up to Rs 50,000 for interest income from postal deposits.
During FY21 tax filing season, few taxpayers appear to have opted into the new regime. According to the fiscal year 22 revenue budget, more than 50% of individual taxpayers derive their income mainly from wages. The salaried class would have opted for the old tax regime as they could claim deductions under Section 80C up to a maximum amount of Rs 1.5 lakh per annum for their contribution to the PF and repayment of the principal amount housing loan, if applicable. In addition, they could claim a deduction on interest on home loans and a lump sum deduction of Rs 50,000 or the amount of salary, whichever is lower. The new tax scheme was not attractive to taxpayers claiming a deduction of more than Rs 2.5 lakh. While the employee category claims deductions under Chapter VI-A, profit-related deductions (i.e. the deduction on certain business income) are not claimed by them. On the other hand, the self-employed group claims both types of deductions. Consequently, the tax impact on salaried individuals is higher than that on non-salaried individuals. Analysis of data from tax returns filed by individuals from 2014 to 2018 (latest such data on the CBDT website) supports this. The average per capita wage income was Rs 7.94 lakh in the financial year 2018, while the average per capita income from business or individual occupation was `5.14 lakh. It is hard to believe that individuals who start a business have less income. The salaried class is subject to withholding tax at source on all of their income even before their salary is paid to them, which leads to the declaration of appropriate income and taxes.
The middle and working class have suffered greatly over the past two years due to job loss, job uncertainty, declining incomes and high expenses. It’s time to give them relief with an easy-to-adhere tax structure that leaves them with more money. Since the six-bracket tax system is not attractive to a large number of taxpayers, it may be appropriate for the government to replace the six-bracket tax structure with a new three-bracket tax structure with no tax deductions or exemptions except in terms of insurance. premium and donations.
This will simplify the tax structure, make reporting easier, provide taxpayers with more money, help citizens over 55 who may not need to claim investment-based tax deductions, and encourage businesses or liberal professions to declare higher incomes. This will ensure that taxpayers make economic decisions based on merit and not on wasted investment in claiming deductions etc. The probable loss of income under this new tax regime will be offset by the abolition of all deductions for this category of taxpayers.
According to the FY22 budget, the revenue impact of providing major tax incentives to HUF individuals/taxpayers is Rs 1.06 lakh crore. If we remove the cumulative impact of deductions under sections 80D and 80G (Rs 5,391 crore), the net saving for not providing major tax incentives would be around Rs 1.01 lakh crore. The government can offset any loss of the proposed tax system from these net savings.
Taxpayers eligible to claim a deduction of more than Rs 3.75 lakh under the old scheme, as compared to the new scheme, can opt to file under the old scheme. The tax impact under the old regime with all deductions and under the new regime with deductions only for sections 80D and 80G can be assessed by the following example. Assuming a taxpayer with an income of Rs 20 lakh contributed Rs 1.5 lakh to 80C deductions, paid Rs 3 lakh to interest on home loan, Rs 75,000 to self health insurance , family and elderly relatives, Rs 1,25,000 to Concession leave travel and Rs 10,000 towards 80G donation, the tax impact under the two schemes would be summarized in the attached graph.
Assuming the taxpayer does not have a home loan, the total deductions under the old scheme would be Rs 4.05 lakh and the taxable income would be Rs 15,95,000. The tax liability would be Rs 3,02,640 under the old scheme, higher than the tax liability of Rs 2.87 lakh under the proposed scheme. The additional deduction under the old scheme is Rs 3.25 lakh (Rs 4.05 lakh minus Rs 80,000 under the new scheme), resulting in a higher tax burden.
Under the proposed tax system, more taxpayers will end up with more money on hand due to lower tax liability, which will also increase consumer spending, a big boon.
Respectively, Chairman, Aarin Capital Partners, and Tax Advisor
Financial Express is now on Telegram. Click here to join our channel and stay up to date with the latest Biz news and updates.