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Budget 2020 to bring bonanza for common man? Major rejig in personal income tax slabs likely

Sumit Jha

Union Budget 2020 India: The forthcoming Union Budget will likely announce a major rejig of personal income tax slabs, including a hike in the exemption limit to Rs 5 lakh, so as to reduce tax liabilities across income segments that a vast majority of individuals belongs to. The move is likely as this is seen needed to boost disposable incomes with households and thereby consumption.

The slabs recast will be mostly in sync with the Direct Tax Code panel's suggestions and in recognition of a need to bridge the gap between the tax incidence on corporate income and income of other persons, including individuals and partnership entities that has widened after the recent sharp cuts in corporate tax rates.

The Budget, however, may not give any big relief to high net worth individuals. This is because it is highly likely to scrap the dividend distribution tax - effectively 22.5% and levied in the hands of the firms that distribute the dividends now - and tax dividends in the hands of recipients at their marginal rates. Besides, it may introduce a new income tax rate of 35% for taxable income above Rs 2 crore. The new top tax bracket may come with or without the super-rich surcharges that are currently being levied.

The PIT slab tweaks would set the government back by nearly Rs 90,000 crore. Sources said taxable income in the range of Rs 5-10 lakh could attract tax at 10% after the Budget compared with 20% now. For taxable income between Rs 10 lakh and Rs 20 lakh, the new rate will be 20%, against 30% now. And the current marginal rate of 30% would apply to income in the range of Rs 20 lakh to Rs 2 crore.

Importantly, despite tax slabs reorganisation, most of the tax exemptions for investments, including social security schemes like pension and health insurance may continue.

So, the Rs 1.5 lakh exemption under Section 80C of the Income Tax Act could continue along with an additional deduction of Rs 50,000 for investment in National Pension Scheme. Similarly, a maximum deduction of Rs 25,000 on health insurance under Section 80D will likely remain. However, the existing deduction up to Rs 2 lakh allowed on interest outgo on home loans under Section 24 could go.

Dividend is currently taxed at an effective rate of 22.55% in the hands of the company. Further, any shareholder earning more than Rs 10 lakh per year from dividend income has top pay 10% tax on the amount. This is seen as double taxation as the source of the income is the same, namely the profit after tax of the concerned firm. Typically, dividend is only taxed in the hands of the recipient in other countries.

In the past, foreign companies have suggested to the government to abolish DDT as they can’t claim credit for the same in their home jurisdictions. The DTC panel also recommended DDT’s abolition. The government has so far desisted from tinkering with DDT as it felt it could encourage firms to make fresh investments instead of rewarding shareholders via dividends.

"Foreign companies can’t claim DDT credit as it’s not a tax on shareholders but on the company. Several suggestions have been made to the government to make DDT a withholding tax, which would then make its credit available to foreign companies," Hitesh Sawhney, partner, corporation and international tax at PwC, said.

But some see merit in the continuation of DDT in the current form. "DDT has its advantages as a collection of tax is administratively easier, the compliance burden on the taxpayer is minimal, and the receipt of the tax revenue is assured, including from non-residents," Naveen Wadhwa, DGM at Taxmann, said.

The Budget in July raised the surcharge on taxable income between Rs 2-5 crore to 25% from 15% earlier. For taxable income above Rs 5 crore, the surcharge was enhanced to 37% from 15% earlier. As a result, the effective tax rate for these two categories went up to 39% and 42.7%, respectively, from 35.9% earlier. However, while the higher surcharge was applicable to individuals as well as trusts — which included foreign institutional investors (FPIs) — the finance minister in August rolled back the hike for FPIs and domestic investors also on their capital gains.