India Inc. and economists have suggested finance minister Nirmala Sitharaman to cut personal income tax rates in the Union Budget 2023-24 to raise consumption in the economy but there are already two options- a lower income tax regime with fewer exemptions and a higher income tax regime with all exemptions in place-- given to taxpayers. First of all, confusion over two regimes should be avoided before going for any fresh reduction in the tax rates.
There are six slabs in the lower tax regime, offered to taxpayers from 2020-21 onwards.
Sources in the finance ministry said, unlike the corporation tax regime, the lower rate option in the personal income taxation space has not attracted many. There are negligible numbers of taxpayers who have opted for a lower tax regime, sources in the finance ministry said.
"Hence it should be done away with," one of the sources said.
Amit Maheshwari, a tax partner at AKM Global, said there are two regimes available to the taxpayer at present (the old regime and the new regime) which leads to significant confusion in the minds of the taxpayers and hence, it is best to have one option.
"The new regime has anyway not been attractive to a large segment of individual taxpayers and therefore, the government should encourage the old regime as this would remain beneficial for those who would have been giving rent, EMIs for home loans, life and medical insurance, and tuition fee for children etc. The importance of insurance, term plans, medical insurance will always continue for taxpayers," he said.
From 2020-21 onwards, the Budget gave an option of a lower personal income tax regime to those earning up to Rs 15 lakh, provided they forgo some exemptions. The new tax slabs now stand at five per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent and 30 per cent. The old regime has the same 10-20-30 per cent slabs. Meanwhile, the surcharge on income tax went as high as 37 per cent for those earning over Rs 5 crore in a year.
Even if a taxpayer opts for a new tax regime, certain exemptions such as money received for gratuity, leave encashment, voluntary retirement scheme etc, are still available. There are also various deductions still available, such as conveyance allowance for expenditure incurred for travelling to work, investment in notified pension schemes, any allowance for travelling for employment or on transfer, etc
On the other hand, the lower corporation tax regime from 2019 onwards has been a huge success.
An analysis of the impact of the concessional tax rates for companies shows that 15.85 per cent of the companies having 62.01 per cent of the total income have opted for the 22 per cent tax scheme and 0.14 per cent of companies with a minuscule income opted for taking benefits under the 15 per cent tax regime in 2019-20.
However, when it comes to personal income taxation, the progress does not seem to be that huge as cited above, though the data is yet to come in the public domain.
Revenue secretary Tarun Bajaj earlier this year had said, "A very few would have taken it (concessional tax regime) because if I find that I have to pay less tax by even Rs 50 in a particular regime, I'll adopt that regime."
He pointed out that the new regime will not gain traction unless this old regime is disincentive and incentives are given for the new regime with no exemptions. “And unless we do that, we will not be able to simplify the tax rates," he said.
Anita Basrur, a partner direct tax at Sudith K Parkeh & Co LLP, said considering the already available regimes, it seems difficult that there would be any further rate cuts for the new regime. Though the new regime has a number of tax slabs, according to the finance ministry, the purpose of reduced tax and more simplified tax is met.
For taxpayers opting for the old regime, the government may consider increasing the limits of exemptions/deductions /rebates rather than going for tax cuts or increasing the limit of income which is not chargeable to tax, Basrur said.
"This would enable the government to achieve the twin objective of providing tax relief to taxpayers as well as to ensure that the base of taxpayers filing the returns is not eroded. In case the rebate limit is pumped up (from the existing limit of Rs 500,000), the taxpayers will still be required to file the tax returns even if no tax is payable by them," she said.
Sandeep Shah, managing partner at NA Shah Associates, however, said there is a valid expectation that the personal tax rates should be reduced not only to fuel consumption but also to have enhanced liquidity to match the post covid situation.
"With no new personal tax exemptions over last several years, dividend and long-term capital gains (from listed shares which in earlier was tax-free) being made taxable, GST being introduced in most of the items touching personal consumption with no set off available, high inflation in every aspect of livelihood (food, education, medical, housing market, interest on loans etc), there is a need to have more disposable income in hands of the individuals," he said.
The reduction in tax rates will be more than compensated through indirect tax being collected with higher consumption, he said.
Maheshwari too said at the personal tax front, individuals would be looking forward to lowering tax rates since the tax rates have remained the same and expecting an increased limit of several deductions such as deductions for repayment of housing loans.
'The effective tax rate for the super-rich should be reduced as well. Besides, the present limit for 80C deduction should be enhanced," he said.
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