Continuing two parallel tax regimes for the long term does not really achieve the aim of simplification of tax administration. Therefore, the government may look at phasing out the old tax regime after the new tax regime has been suitably tweaked to attract the majority of taxpayers. The phasing out process could be immediate or stretched over several years. The former revenue secretary Tarun Bajaj had said, while speaking to the media just before his retirement in November last year, that the new /concessional tax regime needed to be reinvented and once this was done, the government could look at having only one tax regime instead of the current two regimes.
Here’s what Bajaj said in an interview to Business Today: “When you analyse–you find that a large number of the people who file returns in India show income of less than Rs 7 to 7.5 lakh–about 75 to 80% of the people who file returns-if these people use the new regime then they have to pay tax after basic exemption of Rs 2.5 lakh but in the old regime you don’t have to pay any tax–so I am saying clearly that there is a need to relook at the scheme and come out with a scheme which has less number of exemptions and may be larger slabs and the rate which doesn’t shoot up sharply from 5 to 20% but moves up slowly and if we do that then maybe a large number of people would opt for it and then may be at some stage the govt can also think of rather than having two options have only one option.”
He spoke on similar lines during interviews given to other media houses. This is an excerpt from an interview given to CNBC TV18 on the day of his retirement.
“In the new tax regime, tax kicks in at (Rs) 2.5 lakh, in old tax regime up to (Rs) 5 lakh there’s no tax and there are also exemptions then if I take benefit of exemptions of say Rs 1.5 to Rs 2 lakh then up to Rs 7 lakh you don’t pay any tax —about 80-85% of people (tax return filers) have income upto (Rs) 7-7.5 lakh
People who have higher income and are not taking too many exemptions will find new tax regime favourable. I would say we really need to rethink and reinvent the personal income tax regime completely and may be come up with something new-may be have only one regime and not two-(the) aim should not be to increase the tax rates-if it is revenue neutral then ………..that’s what we have done in corporate tax.”
Bajaj was referring to the fact that in the old tax regime, an individual with income between Rs 7 lakh and 7.5 lakh can claim deductions to bring the net taxable income to Rs 5 lakh and thereby pay no tax (by claiming rebate under section 87A). If the same individual opts for the new tax regime, then he cannot claim deductions to bring down his net taxable income to Rs 5 lakh and claim a rebate under section 87A. As a result, he will end up paying income taxes on all incomes above Rs 2.5 lakh.Do note that individuals having taxable income up to Rs 5 lakh do not pay tax under both tax regimes. This is because a rebate of Rs 12,500 under section 87A is available under both regimes. This effectively means that individuals with taxable income up to Rs 5 lakh do not have to pay tax.
Now, the break-even point, for a person below 60 years, between the old and new tax regimes is Rs 2.5 lakh of deductions/exemptions. If a person (below 60 years) is claiming more than Rs 2.5 lakh worth of deductions/exemptions in the old tax regime, then opting for the new tax regime will not help him pay less tax. On the other hand, if the person is claiming deductions of less than Rs 2.5 lakh he would pay less tax under the new tax regime.
Therefore, if (for argument’s sake) deductions/exemptions of up to Rs 2.5 lakh to Rs 3 lakh are introduced in the new tax regime and the basic exemption limit is hiked to Rs 5 lakh, then most people in the Rs 7 to Rs 7.5 lakh income bracket (which, as mentioned above, form the bulk of the tax return filers) would pay nil or almost nil tax (provided they fully claim the exemptions/deductions). This would bring the new tax regime on par with the old one for this category of people.
Once the bulk of the ITR filers shift to the modified new tax regime, the government could decide to phase out the old tax regime.
Bajaj, during the interviews, clearly said that he was not part of the budget preparation exercise and would not be able to comment on whether these changes would form a part of the budget. However, it is to be noted that it is slightly unusual for secretary level officials to discuss such changes, albeit as a personal opinion, just before retirement. It is possible that he may have been trying to start a wider debate on this topic to see the response of the people as a prelude to the budget exercise.
In fact, he had done exactly the same thing earlier (just after the last budget) by saying that in his opinion the long-term capital gains taxation needed streamlining. He had said that this was done to start a public debate on the issue.
There are media reports that the taxation of capital gains may be simplified for different asset classes in Budget 2023. However, the outcome of the public debate started just after the last budget is yet to be seen.
Answering the question as to whether he thought that the time was right to do away with one of the tax regimes, he said: “but you will need to re-do the new tax regime -you can’t tell people who are not paying tax on Rs 7 lakh income (under the old tax regime) to start paying at Rs 2.5 lakh-we have to take care of this -aspirational strata-we have to take care of that.
May be we can have only one regime but in that we will have to tinker with the regime.
I am not too sure whether it will happen this year or not-Sanjay (Sanjay Malhotra the current revenue secretary who took charge after Bajaj) will take a decision-but in terms of preparation it is not too difficult-we have invested in data and tech-and we can easily get data and take a considered view.”
Going by what Bajaj said, only a few exemptions may be retained and most others would be removed. In another interview to the media (Financial Express) he had said: “In personal income tax, minimal exemptions should be given and the tax brackets should be expanded. “For instance, the tax bracket (for 20% tax) can be from Rs5 lakh-15 lakh instead of Rs5 lakh-10 lakh. This can be a revenue-neutral exercise and the regime will be simpler.”
He also said that while certain exemptions such as insurance premium for senior citizens would still be needed, most such concessions could go. “Small savings give better interest rates and tax exemption also,” he had said. Perhaps hinting that both are not needed together.
The changes discussed above are only a possibility and whether they happen or not this year will be known only on Feb 1, 2023.