Lowering of personal income tax as proposed in the DTC
October, 03rd 2019
The slab rates proposed would rationalise the present ones and do away with surcharges.
The government recently announced across a broad tax rate cut for corporates. The measure appears to be in line with the recommendations of the much-awaited Direct Tax Code (DTC) report that was submitted to the Finance Ministry on August 19, 2019. The report has not been made public yet. However, the government has picked up one of the key and much-awaited direct tax reforms from the DTC report.
While the measures would bring down the tax outgo for corporates and make them competitive, a further boost is required on the consumption side. The DTC report has also recommended the lowering of tax rates for individual taxpayers. So, while the supply side of the story is being dealt with, the demand side needs a fillip too. Here are some measures to boost public confidence and consumption.
Rationalise income tax slabs
The DTC has suggested the rationalisation of slabs with a rate of 5 per cent for incomes of Rs 2.5 lakh to Rs 5 lakh, 10 per cent for those earning Rs 5 lakh to Rs 10 lakh, 20 per cent for Rs 10 lakh to Rs 20 lakh, 30 per cent from Rs 20 lakh to Rs 2 crore and 35 per cent for those with incomes above Rs 2 crore.
The slab rates proposed above would rationalise the present ones and do away with surcharges. A rationalisation of the slabs, especially for taxpayers earning below Rs 50 lakh would lower their overall tax incidence to around 25 per cent, similar to that of corporates. This would leave more funds for households to spend and save.
Removal of surcharges would also make the tax policy more certain. Surcharges have been tweaked often to add to the central government’s kitty. The wider tax slabs would be in consonance with increasing living costs of taxpayers. However, the growth in direct tax collection for the period April to September of FY 2019-20 has been tepid. The government may need to evaluate the tax cuts with the target of boosting consumption demand and indirect tax collections.
Streamline savings and boost investments
The government should consider the introduction of saving schemes with attractive interest rates and channelize funds for investment in specific sectors. A deduction can be introduced for investment in long-term infrastructure bonds similar to those issued earlier under section 80CCF. Similarly, the government can consider including debt mutual funds to mobilise investments under section 80C. Inclusion of debt mutual funds would boost investments in government securities. However, these measures are usually budget tweaks and may be attempted when the time comes. The above measures would help channelize a portion of the tax savings back into the economy.
The government has set a disinvestment target of Rs 1,05,000 crore for FY 2019-20. The recent slump in the capital market had put the disinvestment target under a cloud. However, with the recent announcements for the corporate sector and withdrawal of enhanced surcharge on listed equity gains, the disinvestment target appears reachable. The surplus money in the hands of the taxpayer would also boost retail investor confidence and participation in the capital market.
Promote participation in the equity market
A comprehensive review of the long-term capital gains regime is required. There are different periods of holding of different types of asset for qualification as a long term asset. Property is only required to be held for two years to qualify as a long-term asset and to avail the benefits of capital gains exemption. Equity shares must be held for one year. Different assets have different dates and too many tweaks have meant that there is a wide disparity on how long a particular asset must be held. The DTC has suggested retaining the long-term capital gains tax (LTCG) and Securities Transaction Tax (STT).
While the lowering of the corporate tax rate and withdrawal of the surcharge is having a positive impact on the confidence of the retail investor, a rationalisation of the individual tax slabs and period of long-term capital gains would make the equity asset class affordable and attractive.
Processing of income tax returns and assessment
The income tax department should target to reduce the processing time for income tax returns filed to about a month. At present, returns are processed in an approximate period of three months by the centralised processing centre.
The government could consider increasing the basic exemption limit to Rs 5 lakh and do away with the exemptions and deductions. This would simplify the tax calculations and the income tax return filing process. The government could retain focus toward granting of investment-oriented deductions such as investment in real estate, government securities, bonds and so on. For bringing parity between the small business taxpayer and the salaried taxpayer, the salaried taxpayers should be given a standard deduction. The standard deduction should aim to cover expenses such as rent, conveyance, medical expenses, telephone and such other expenditure incurred by an employee.
The government has initiated steps towards faceless e-assessment. The government has launched the e-assessment scheme on September 12, 2019 to put in place a structure to facilitate e-assessment proceedings. A ‘National e-assessment centre’ would be set up in Delhi to conduct e-assessment proceedings in a centralised manner. All notices would be issued, and information requests made by the ‘National e-assessment centre’. The scheme is a major step in improving the image and relations between the taxpayer and the income tax department. A technology-driven approach would facilitate compliance, tax collections and curb high-pitched assessments.
The DTC panel has suggested ‘mediation’ for a negotiated settlement of disputes. This would give a taxpayer the option for negotiated settlement once they receive a draft order. This would help in reducing the litigation and the money stuck in tax demands.
The present income tax law imposes a dividend distribution tax (DDT) at the corporate level, an effective rate of 20.56 per cent. The distributed dividends are tax-free in the hands of the investors. However, dividends received in excess of Rs 10 Lakh are taxed at 10 per cent in the hands of the shareholders. Additionally, the profits out of which the dividends are paid are subject to a corporate tax of 30 per cent. Thus, dividends are taxed thrice.
The task force on DTC has proposed abolishing of the DDT. The task force has recommended taxation only in the hands of the shareholder.
The government should continue reforming the direct tax law in accordance with the changing needs of the economy and to accommodate increased cost of living.