The aforesaid statistics signify that individuals are among the major contributors of tax in India and, thus, actively participate in the economic development and growth of the country.
The Central Government has done historical reform on corporate tax front by bringing down the maximum corporate tax rate to 25.17% and a further concessional tax rate for new manufacturing companies of 17.16%. It is an opportune time for the Central Government to rationalise certain aspects of Personal Income Tax in the Budget 2023, some of which are as follows.
1. Convergence of old tax regime and new concessional tax regime: As per the provisions of the Income Tax Act, 1961, individuals have an option either to file their income tax regime (ITR) under the old tax regime — which offers all the exemptions and deductions — or under the new, concessional income tax regime in accordance with the provisions of Section 115BAC of the Income-tax Act — which offers concessional tax brackets but does not allow most commonly used exemptions and deductions such as deduction under Section 80C, interest on housing loan for self-occupied property and standard deduction.
Most salaried taxpayers compute their income tax liability and file ITRs on their own, without any professional assistance. Thus, at times, it becomes quite difficult for them to assess and choose the most favorable tax regime each year. Further, the provisions are rigid for individuals deriving business income to switch between the regimes every year. This means that in case an individual taxpayer deriving business income opts for the concessional tax regime, such an option can be withdrawn only once in the taxpayer’s lifetime. Further, once withdrawn, then they cannot opt for it again.
Considering that the new income tax regime restricts many basic exemptions and deductions such as HRA exemption, deduction under 80C (LIC premium, ELSS, PPF contribution, 5-year bank fixed deposits, etc.), 80D (mediclaim premium) and standard deduction of Rs 50,000 available for salaried employees, as well as owing to the lack of awareness of the comparative evaluation of the 2 regimes, many individual taxpayers do not select the regime which is more beneficial to them .
Thus, the concept of two tax regimes is unnecessarily creating confusion for most individual taxpayers making the personal tax structure complicated. Hence, the convergence of both the income tax regimes and maintaining only one tax regime with certain limited benefits, such as Section 80C deduction and housing loan interest deduction, will simplify and rationalize the personal tax structure for individual taxpayers. It is also important to raise the basic exemption limit from Rs.2.50 lacs to Rs.3.50 lacs and abolish the highest slab of 42.744%. This will reduce the number of tax slabs, provide relief to the marginal taxpayers and reduce the highest effective personal tax rate to 39%.
2. Capping of income tax on dividends:
Prior to financial year 2020-21, if a shareholder received any dividend from a domestic company, he was not liable to pay any tax on such dividend as it was exempt from tax under section 10(34) of the Income-tax Act. However, the government in Budget 2020 abolished the concept of Dividend Distribution Tax (DDT) and made it taxable in the hands of shareholders from financial year 2020-21.
Such an amendment gave rise to a disparity between resident and non-resident individuals (NRI) with regards to taxation. Currently, the dividend income is taxable in the hands of the resident individual at the applicable marginal slab rates (plus applicable surcharge rate and health and education cess). The effective income tax rates on dividends can range from 20.80% to 35.88%. However, for non-resident individuals, such dividend income is taxable at a standard rate of 20% (plus surcharge and cess) under Section 115A of the Income-tax Act. NRIs can further benefit from lower tax rates ranging between 5% and 15% under multiple tax treaties. Thus, resident individual taxpayers with total income exceeding Rs 10 lakh are subjected to a higher tax liability as compared with NRIs. Further, there is a double taxation as the companies distributing the profits first pay corporate tax and the same is again taxed in the hands of the shareholders.
Thus, to reduce cascading tax effect and protect the interest of the resident individual shareholders, it is recommended that the tax on dividend be capped at 20% for resident individual shareholders.
3. Enhancing the tax deductions under Section 80C:
An individual (salaried and self-employed) can claim deductions under Section 80C via a number of savings/investment-linked deduction options such as LIC premium, ELSS, PPF and employee’s contribution to EPF/superannuation fund. Section 80C allows an individual a deduction of up to Rs 1.50 lakh for a particular financial year. Apart from the aforesaid mentioned savings options, the section also covers certain expenses such as the principal component of a housing loan and children’s tuition fees paid in India.
Thus, the limit of deduction is lower when compared with the vast scope of this section.
The savings rate in India is also showing a reducing trend. Hence, the said limit under Section 80C needs to be enhanced to Rs 3 lakh as it was last revised in Budget 2014 and such revision is now long overdue.
4. Enhancing the threshold limit for Section 80D
Section 80D of the Income-tax Act provides for deduction with respect to payment for medical insurance premium. The deduction under Section 80D is restricted to Rs 25,000 for individuals (self and family) and Rs 50,000 in case of senior citizens. After the pandemic began, health insurance premiums have increased and mediclaim policies have become dearer due to rising inflation and medical cost. Thus, there is a need to enhance the threshold limits by Rs 25,000 each, to benefit the struggling individual taxpayers.
5. Increase in the threshold limit in case of payment of advance tax/
The threshold limit of Rs 10,000 for payment of advance tax was last amended in Budget 2009. Considering the inflation in the economy over the last 13 years, as well as with an intention to reduce the compliance burden, the threshold limit of Rs 10,000 must be increased to Rs 30,000.