Individual taxpayers are hoping for some beneficial tax reforms in the upcoming Budget 2020 to restitute economic sentiments.
We have recently seen a notable reduction in the corporate tax rates and rationalisation of the Goods and Services Tax (GST) rates. While such measures to turn the tide in the downward spiralling economy has been well-received by the industry, it has also called for a reduction in personal tax rates from all the sectors. These thoughts have been echoed by various federations and chambers who have suggested a rejig of the income tax slabs to give more spendable income to individual taxpayers.
When we look at the income threshold limits on which tax is levied for individuals, the last change was made in 2014 when the Modi government presented its first Union budget. Since then, there has not been any major change in these limits albeit some benefits and sops which were given in the years that followed. In fact, we saw the highest tax rate applicable to an individual being raised to 42.744 per cent in July 2019 when the full budget for FY 2019-20 was presented. The erstwhile maximum tax rate was 35.88 per cent – this jump of nearly 7 per cent has hurt even the super-rich.
The interim Budget presented by the government in February 2019 extended the full tax rebate to resident individuals with total income up to Rs 5 lakh. As per the government’s statistics for AY 2018-19, this income category accounts for 63 per cent (3.49 crore out of 5.52 crore income tax returns filed) of the total individuals who file income tax returns (ITRs). The remaining 37 per cent have not had much to cheer about and in fact, have ended up paying more tax by way of surcharge in case the total income exceeds Rs 50 lakh.
In the upcoming Budget, standard deduction from salary, which was re-introduced a couple of years ago, maybe made more progressive like the tax slabs, as per the income level of the taxpayer, to give more benefit to the salaried class.
In past years, many changes have been expected from the government with respect to the allowances and deductions available to the common man. However, the maximum limit of various allowable deductions available for claiming tax benefit have remained constant. For example, children’s education allowance is exempt up to Rs 100 per month for maximum two children has not been changed over the years.
As per reports, the Indian economy is growing at around 5 per cent in FY 2019-20, which is the lowest in the past 11 years. Mere reduction in tax rates will not give enough stimulus to reverse this downturn. Investment-linked schemes that allow a deduction from taxable income needs to be introduced to encourage and boost investment in the economy. Deduction of Rs 1.5 lakh available under section 80C of the Income-tax Act, 1961 has not changed since 2014. Moreover, long-term capital gains from listed shares and equity-oriented mutual funds which were totally tax-free earlier, have been brought under the ambit of tax in the Union Budget of 2018. The government could consider increasing the threshold limits to encourage investment which will ultimately infuse more capital into the economy.
Given the state of the economy, this is perhaps the most crucial budget under the Modi regime. The taxpayers’ wish list may continue to run long year after year, however, the government also needs to strike a balance between dreams and reality so that the pocket of the exchequer does not run dry and fiscal deficit does not go out-of-hand.
(The author is Tax Partner, EY India.)