Budget 2021 Wishlist: Higher Income Tax Exemption Limit, Capital Gains Tax Changes
A cashier counts Indian one hundred-rupee banknotes in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Budget 2021 Wishlist: Higher Income Tax Exemption Limit, Capital Gains Tax Changes

Two Mumbai-based bodies representing chartered accountants and industry have urged the government to simplify and rationalise direct taxes and allow more deductions to taxpayers in their pre-budget memorandum issued in December.

The Bombay Chartered Accountants’ Society and Bombay Chamber of Commerce and Industry have sought several changes in the existing tax regime in light of the economic slump caused by the outbreak of Covid-19 and its impact on taxpayers.

This comes at a time when India saw its tax collections drop for the first time in nearly two decades in April, dipping further till August and recovering slightly in the Aug-November quarter. The government, on its part, announced a slew of measures earlier this year to help taxpayers under its Covid-19 economic package.

Here are the key suggestions by BCCI and BCAS;

Personal Tax

Income tax exemption limit: The BCCI has proposed a reduction in the income tax burden on lower income families. It has urged the government to increase the minimum taxable income threshold from Rs 5 lakh to 7.5 lakh. Further, it has highlighted the need for a 50% reduction in tax deducted at source on salary income to boost liquidity in the hands of taxpayers.

Interest on delayed payment of tax: Salaried taxpayers are currently required to pay interest at the rate of 12% per annum on any default in payment of advance tax.

Usually, taxpayers end up paying such interest on the difference between the tax already deducted by an employer and their final tax liability. In certain instances, this default can also be attributable to short deduction or deferred payment by the employer due to change of employment. Yet, the burden of interest payment falls on the employee. Citing this issue, the tax bodies have made the following suggestions:

  • The BCAS has suggested that in such situations interest on delayed payment of advance tax should not be charged to employees. Similarly, the threshold for payment of advance tax must be increased from Rs 10,000 to Rs 1 lakh.

  • BCCI has urged the government to reduce punitive interest rate from 12% to 6% due to the outbreak of Covid-19 and to bring it in line with similar reduction under the GST.

Revised threshold for deductions: Employees are entitled to claim certain monthly deductions as well as special exemptions under the head “Income from Salaries”. Citing that some of the thresholds for allowable deductions or exemptions have not been revised since the last two decades, the BCAS has suggested following modifications:

  • Exemption limit on retrenchment compensation or amount received under voluntary retirement scheme by an employee must be increased to Rs 10 lakh from existing 5 lakh.

  • Children’s education or hostel allowance—Rs 2,000 per month from existing 100/300.

  • Monetary limit for an employee to add perquisite—Rs 100,000 from existing 50,000.

  • Perquisite for lunch or refreshment: Rs 200 per meal instead of existing 50.

  • Value of any gift on ceremonial occasions or otherwise: Rs 15,000 from Rs 5,000.

Corporate Tax

The Covid-19 outbreak has severely affected the fortunes of India Inc. Next year’s budget will come at a crucial juncture when companies would have started recovering from a prolonged slump and thus need government support.

Against such backdrop, the BCAS and BCCI have made the following suggestions on corporate tax:

BCAS

  • CSR expenditure: Businesses must be allowed 100% deduction on amounts spent by them on Corporate Social Responsibility under section 135 of the Companies Act, 2013. Currently, the tax law does not allow any deduction on CSR expenditure. BCCI has also made a similar suggestion.

  • Tax implications on conversion of company to LLP: Currently, the conversion of a private company into a limited liability partnership is not considered a “transfer” for taxation purpose if its sales/turnover or gross receipts have not exceeded Rs 60 lakh in any of the previous three years. The society has suggested that there should be no such threshold.

  • TCS exemption: Business-to-business transactions must be excluded from 1% tax at source reduction requirement for goods or services facilitated through digital or electronic platform.

  • Provisions relating to the General Anti Avoidance Rules must be limited to non-resident taxpayers only.

BCCI

  • Quantum of tax to be deposited for grant of stay by the Income Tax Appellate Tribunal must be reduced from existing 20% to 10% to bring it in line with the GST regime and period of stay must be allowed beyond 365 days in certain cases.

  • Restrictive eligibility conditions for claiming lower rate of taxes by newly established domestic manufacturing companies must be rationalised. Last date for commencement of manufacturing by such units must be deferred to Mar. 31, 2025 due to delays caused by Covid-19.

Confederation of Indian Industries

The CII has focussed on the need for fiscal and policy reforms, along with suggestions relating to tax and appeals in its memorandum on the next year’s budget. It has recommended that:

  • Tax litigation: The government must prescribe a definite timeline for disposal of appeals by the commissioner (appeals) under the Income Tax Act. Similarly, the monetary threshold for filing of appeals by the tax department must be raised to Rs 1 crore for the Income Tax Appellate Tribunal, 2 crore for high court and 5 crore for the Supreme Court.

  • Number of adjournments by the tax department or taxpayer must be limited to maximum two.

  • Deductions: The Section 80JJAA of the Income Tax Act allows deduction of 30% on additional employee cost incurred by a taxpayer on new employees. At present, this benefit is only available with respect to employees drawing wages up to Rs 25,000. The CII has recommended that this limit must be doubled to Rs 50,000.

  • Vivaad Se Vishwas scheme, the tax dispute resolution mechanism, which will end on Dec. 31, must be extended for further six months till June 30 next year.

Capital Gains

Tax bodies are also hoping for changes in provisions relating to capital gains.

The BCCI has suggested reduction of holding period in debt-oriented growth mutual funds to 12 months from existing 36 months for it to qualify as a long term capital asset. To boost the real estate sector, it has urged for a reduction in LTCG rate on real estate assets at 10%, and and the holding period to 12 months.

STCL Setoff: As of now, taxpayers are allowed to set off short term capital losses only against long- or short-term capital gains. Citing that the rate of tax on STCG is similar to the income under any other head, the BCAS suggested the government must allow set-off for short-term capital loss against any other income head.

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