Taxpayers may see an increase in exemption limit if not I-T reduction

The overwhelming electoral mandate with which the National Democratic Alliance led by the Bharatiya Janata Party has returned to run the country for the next five years is a strong validation of the various transformational initiatives that were launched during its first term. The Finance Minister is in a position of strength to roll out a “tough” policy-centric budget and build further on to bring to reality the vision to make India a $5 trillion economy by 2025, and a $10 trillion economy by 2032.

In cricketing speak, the opening spell of NDA 2014-19 was the time when the government batted sensibly, focussing on the need to improve the lot of Indians — promising social security for all Indians, bank accounts for the poorest of the poor to plug leakages in transfer of benefits meant to reach them, health care for all, housing for all, insurance for all, support for small and marginal farmers, clean India, digital India, Make in India, and a multitude of other schemes. Some daring shots were also hit — demonetisation, getting Goods and Services Tax across the boundary, enactment of laws such as The Black Money Act, 2015; The Insolvency and Bankruptcy Code Act, 2016; The Benami Transactions (Prohibition) Amendment Act, 2016; The Aadhaar Act, 2016; The Fugitive Economic Offenders Act 2018; setting up the process to bring in tax reforms, and labour law reforms for the organised and unorganised work force.

It would be fair to say that the FM has the advantage of a good solid innings. Now is the time for her to accelerate the run rate and aim for a match-winning score.

The main theme of the Budget has to be how to fortify the Indian economy to jumpstart sluggish growth, attract investment, increase consumption, and create jobs. The road map to a mega economy includes the need to lower tax rates, and improve compliance to broaden the tax base. The focus on macroeconomics will also address the concerns of every Indian.

A gainfully engaged Indian expects the Budget proposals to pave the way for lower tax rates, simplified and predictable direct tax system to ease compliance, ease of accessing capital, and stability and security in money markets for greater investor confidence. 

Should tax rates be lowered?

It is well known that the tax-to-GDP ratio, though much improved in recent years, continues to be fairly low. The number of persons filing tax returns in India, too, continues to be extremely low. More Indians need to be encouraged to pay taxes.  

An across-the-board reduction in personal income tax rates is unlikely as the government has neither the financial leeway nor the political compulsion to do so. That said, the Finance Minister may not want to disappoint low- to middle-income earners in her maiden Budget. The Budget proposals may have some limited personal income tax incentives, such as increase in limit for tax deduction under Section 80 C of the Income Tax Act from Rs 150,000 to Rs 200,000, and/or an increase in the deduction available for interest on housing loan for a self-occupied house property from Rs 200,000 to Rs 300,000, or change in the threshold limit for low-income earners.

However, to be able to make any change that will result in reducing the number of tax payers or impact tax collections, the FM will also have to identify alternative ways to increase personal income tax collection. Therefore, we may well have some proposals to put into motion the need for higher rates for high-income earners (similar to the ongoing “fair share” debate in the US), particularly since the government has to achieve the targeted growth of 17.2 per cent for 2019-20 for personal income tax collection. However, care needs to be taken regarding how a high-income earner is defined.

In my view, the timing may not be appropriate for the introduction of debatable taxes, such as inheritance tax or estate duty, as we need to retain our entrepreneurs and preserve our capital in India to fuel economic growth. The FM may well propose a favourable tax regime to encourage first-time entrepreneurs to set up and run start-ups.

New direct tax law and tax reforms

It is likely that the Finance Minister will defer much of the new tax policy and law related changes to be brought in through the new direct tax law, which is under preparation by a task force set up by former Finance Minister Arun Jaitley in 2017 to review the existing Income Tax Act. The task force is expected to focus on structural tax reforms aimed at ease of compliance and increasing the tax base. It is expected to submit its report by July 31, 2019.

Tax payers can expect the new direct tax law, once it is enacted, to have the features of simplified tax provisions, updated Income Tax Rules based on international best practices, faceless and anonymised tax assessment, mechanism for system-based cross verification of financial transactions, reduction in litigation and expeditious disposal of appeal, reduction in compliance burden by simplification of procedures, and sharing of information between GST & Customs authority, Central Board of Direct Taxes  and Financial Intelligence Unit. 

Tax payers can also expect pre-filled tax forms and increased tax payer services from the Tax Department. An ambitious Central Processing Centre (CPC) 2.0 Project is already underway.

In fact, even for financial year 2018-19 for which the tax return is to be filed now, most of the information is pre-filled by the Income Tax Department in the Income-Tax Return form (ITR-1). It can be easily filed with very little effort by the individual tax payer, using the e-filing website of the Income-Tax Department. It points to the state-of-the-art technology being used by the Tax Department and the considerable efficiency in collection of tax payers’ income data.

Black money and benami transactions

The government is expected to continue its clean money campaign so as to fine-tune tax rules and laws to plug leakages and put a check on cash transactions. The CBDT has recently released a notification on “compounding” of offences, which specifies that no compounding (monetary fine in lieu of prosecution leading to imprisonment if guilty) would be available in case of wilful evasion of taxes, multiple TDS defaults, and offences under the Black Money and Benami Transactions Act.

Possible levy on cash transactions

The government may bring in budget proposals to discourage the usage of cash — possibly a levy or cess on cash withdrawals of more than Rs 10,00,000 during the financial year and/or cash transactions of more than Rs 100,000 on a single day.

Security for investors

Given the recent events in the market and the liquidity squeeze, the Budget is likely to carry proposals to recapitalise banks and make capital available at competitive rates, so that people feel encouraged to undertake commercial activity and thus create more job opportunities. Further, the Budget may propose bringing in measures to restore investor confidence in the financial markets.

Go Madam Finance Minister, go. We expect a match-winning innings from you.

What to expect

 

• The limit for tax deduction under Section 80 C may be hiked from Rs 1.5 lakh to Rs 2 lakh
• Limit on deduction available for interest paid on housing loan for a self-occupied house may be raised from Rs 2 lakh to Rs 3 lakh
• There may be proposals to hike income tax rates for high-income earners
• Imposing estate duty/inheritance tax now may be untimely
• Expect sops for first-time entrepreneurs to help nurture startups 
• There may be more proposals that carry forward the government’s drive against black money
• Expect steps to curb usage of cash above certain thresholds

The writer is partner & leader-India region, People Advisory Services, at EY India