Budget 2020: Is It Realistic To Expect Changes To Personal Income Tax Rate?
An individual Income Tax form for the 2018 tax year is arranged for a photograph. (Photographer: Daniel Acker/Bloomberg)

Budget 2020: Is It Realistic To Expect Changes To Personal Income Tax Rate?

Reduction in personal income tax rates has consistently featured on the list of top asks before every Budget. This year, the clamour for it is compounded by the reduction in corporate tax rates in September last year. But the growing fiscal deficit concerns and fall in direct tax collections may override the optimism of a rate cut, experts told BloombergQuint.

Presently, annual income of up to Rs 2.5 lakh is exempt from tax for individual taxpayers up to the age of 60. Income between Rs 2.5-5 lakh is taxed at 5 percent; between Rs 5-10 lakhs at 20 percent; and above Rs 10 lakh at 30 percent. A cess of 4 percent is applicable on all three brackets. In last year’s budget, an additional surcharge of 7 percent was imposed on taxable income between Rs 1-10 crore and 12 percent on taxable income above Rs 10 crore.

It’s unlikely the government will increase the basic exemption limit of Rs 2.5 lakh because they wouldn’t want to lose the tax base, Sudhir Kapadia, national leader and partner at EY India, said. What they could potentially do is introduce a lower tax rate for individuals who agree to forego deduction, he said.

In principle, this seems to be an attractive option—taxpayers won’t have to scramble to make investments under various heads—80C, 80D etc; they get a pre-filled tax return and a lower rate is applied for them. Just like they did in September for corporates—a lower tax rate of 22 percent if a domestic company doesn’t avail of exemptions.
Sudhir Kapadia, Partner, EY India

Any changes to personal income tax will be revenue neutral—the government doesn’t have the fiscal space to give away more on direct tax, but this approach will simplify the tax returns filing process for individuals, he said.

Direct tax collections till Jan. 15 stood at Rs 7.3 lakh crore, down 5.2 percent year-on-year, the Indian Express newspaper reported.

But Parizad Sirwalla, partner at KPMG India, is hoping that Budget 2020 will focus on revival of the economy. Post reduction of corporate tax rates, reforms are awaited on the personal tax front to increase disposable incomes and boost overall consumption and investment, she said.

Individuals in the higher income category expect that the existing threshold of Rs 10 lakh, which is taxable at 30 percent, should be increased to Rs 20 lakh.
Parizad Sirwalla, Partner, KPMG India

The common man also expects an increase in limit under section 80C from Rs 1.5 lakh to Rs 3 lakh, and an increase in home loan interest deduction for self-occupied property which is at Rs 2 lakh.

Girish Vanvari, founding partner at tax consultancy firm Transaction Square, said that the government may implement a suggestion by the Direct Tax Code committee—of introducing a 20 percent rate for taxable income between Rs 10-20 lakh. The DTC panel had recommended creation of five income tax slabs versus the current three:

  • Upto Rs 2.5 lakh: Exempt.
  • Rs 2.5-10 lakh: 10 percent (with a full rebate upto Rs 5 lakh).
  • Rs 10-20 lakh: 20 percent.
  • Rs 20 lakh-2 crore: 30 percent.
  • Rs 2 crore plus: 35 percent.

Rationalising personal income tax rates would cost the exchequer about Rs 80,000 crore but doing away with various exemptions could offset the revenue shortfall, a government official had told BloombergQuint after the DTC committee had submitted its report. The move, according to the official, would also significantly improve compliance.

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