Budget 2020 Expectations for Income Tax: The maiden Budget of Finance Minister Nirmala Sitharaman aggrieved the High Networth Individuals (HNIs) on whom there was an additional tax levy in the form of an increased surcharge. This effectively increased the tax rates for individuals earning more than Rs 5 crore to a whopping 42.74 per cent.
With the introduction of reduced corporate tax rates to 17 per cent/25 per cent by the Taxation Laws (Amendment) Act, 2019, there have been hearsays to suggest recalibration of individual slab rates. Considering that the thrust of Budget 2020 will provide a boost to the slowing economy, it is believed that rationalisation of tax rates for individuals will mean extra cash in the hands of the people, and thereby have a domino effect in pushing demand for goods and services.
Even otherwise, considering the limited tax planning opportunities available to individuals, it is only fair that the maximum marginal tax rate of a company and an individual is at par. Moderate tax rates could also influence the decision-making matrix of a highly skilled professional wanting to come back to India.
In the same breath, in light of the inflation over the years, it is also time for the Government to hike the meagre limits for allowances and deductions. For instance, currently maximum deduction available under section 80C is capped at a mere Rs 1.5 lakh. With the ageing economy on a rise and no dedicated social security program, the government should consider increasing these limits to encourage people to save for their old age with tax efficiency. Also, other allowances relating to travel, children's education, medical, etc should be increased.
Another area of disparity is the manner in which dividend income is taxed in the hands of individuals vis a vis the corporates. Currently, post payment of dividend distribution tax (DDT) by a company of ~21 per cent, the recipient corporate shareholder is not subject to any further tax on such dividend income. However, the individuals are subject to an additional levy of 10 per cent which for HNIs (earning more than Rs 5 crores) translates to an additional levy of ~14.25 per cent on the post-tax dividend income received. One hopes that the speculations with respect to DDT being done away with in this Budget are indeed true and there is parity in taxation of dividend income.
However, in all this ado, one should not forget that the need of the hour is also an increased spending by government on public infrastructure. Amidst the discussions between concessions and high fiscal deficit, how does the government fund these initiatives? Speculations are rife in the market that the estate duty may be re-introduced to balance the revenue collection. However, the government should realise that such actions could be counterproductive, as in wake of a tax on inheritance, the Indian promoters may give up their residential status or move the ownership overseas as tax planning measures.
Budget 2020: Your income tax burden may come down – Top 5 Expectations
India certainly needs to increase its tax collections. However, an increase in direct or indirect tax levies, is not the answer. As per the Income-tax return statistics released by the Income-tax department in October 2019 for financial year 2017-18, only 5.5 crore tax returns were filed by individuals.
With India's population of 1 billion plus, this ratio is extremely low. The government should consider making it mandatory for individuals earning exempt agricultural income to report their income, as indeed several farmers are wealthy individuals. The tax authorities could also consider deploying data analytics and advanced artificial intelligence tools to measure and map the sources of luxurious lifestyle with the returned income and unearth undisclosed sources of income.
With the conclusion of the Halwa ceremony, India Inc now keenly awaits to savor the dish and pass its verdict.
(Authored by Saumil Shah (Partner) and Shruti Lohia (Principal) of Dhruva Advisors. The views expressed here are those of the authors.)