A careful balance between tax collections & tax relief that has a positive spiral effect on the economy
There is a heightened focus and expectations from the ensuing budget considering the economic slump caused due to the pandemic and the impact it had on the taxpayers, particularly the individual taxpayers. Though the nationwide vaccination drive has started and should help bring back day to day life to its normal routine, the adverse effects of COVID-19 viz. unemployment, small business shutdowns, decrease in income/ wage levels, dip in savings, etc. have adversely impacted many households.
Therefore, it’s natural that households are looking at Budget 2021 with much hope and admiration to revive the business and economic activity in the country. This article seeks to outline some of the anticipated proposals/ announcements from the Government on the personal tax front.
Enhancement of annual base taxable income threshold:
In light of current macro-economic headwinds, such as low growth and high inflation, the Government may consider a reduction in individual tax liability, by enhancing the base taxable income threshold from Rs 5,00,000 to Rs 6,50,000 – under the old tax scheme as well as the new tax scheme. An increase in the minimum taxable income limit and a consequent reduction in the tax outgo, would result in a higher residual sum and eventually higher purchasing power in the hands of individuals and small entrepreneurs, who constitute majority of the taxpayers and have been most impacted by the ongoing pandemic. This would also assist in reviving domestic consumption.
Even if the tax slab rates are not increased due to fiscal constraints, the government should refrain from increasing the tax rates in the form of surcharge and cess, as it would adversely impact the household’s budget. At best, in such a scenario a status quo should be maintained vis-à-vis the effective tax rates this year.
Meeting the cost of education:
Further, it is a fair expectation that a higher exemption limit on allowances for children's education should be provided. During the year 2020, a significant rise in the cost of education has been witnessed due to the relative creation of infrastructure to meet the new requirements of online education. Under the current income-tax law, children's education allowance of Rs 100 per month per child, up to a maximum of two children, and hostel expenditure allowance of Rs 300 per month per child, up to a maximum of two children, are allowed as tax-exempt. However, these sums are unlikely to provide any relief to the taxpayers considering the current education costs and inflationary trends and needs an earnest resetting of the tax exemption limits.
Increase in the investment allowance limits under Section 80C of Income-tax Act (ITA):
The extant tax deduction limit of Ra 150,000 as provided under Section 80C of the ITA and the overall limit under Section 80CCE, was last increased through the Finance Act, 2014 (earlier limit of Rs 1 lakh was introduced in 2005). The current limit does not provide enough opportunities to the individual taxpayers to allocate their savings in various options such as investment in Public Provident Fund, Life insurance policies, National Pension Scheme, Equity-linked savings scheme (ELSS). Sometimes, the payment towards the housing loan principal payment eats-out on the contributions needed towards much-needed saving avenues.
Further, under the new tax scheme, deductions under Section 80C, 80D (medical insurance premium), etc., are unavailable to individuals who wish to claim for a lower rate of tax. It is important to note that not providing tax benefits on some of the investment instruments, makes them less attractive especially when the interest rates are constantly on the decline. Thereby, making fixed deposits, ELSS, NPS, and availing life insurance, etc. less attractive for taxpayers. Therefore, the Government may review these provisions and provide much-needed relief on this account.
Relooking at available tax breaks on residential housing:
The real estate sector plays an important role in the overall economic growth. It provides large scale employment to semi-skilled and un-skilled labour and provides a boost to the feeder industries like cement, steel, logistics, etc. Further, Government also wants every household in the country to own a house. Therefore, tax benefits relating to the housing sector should be considered more favorably. At present, an individual taxpayer can claim interest deduction up to Rs 200,000 annually only for self-occupied house properties. It would be worthwhile to consider enhancing the deduction allowance up to Rs 3,00,000 per annum. Additionally, the Government may consider enhancing the current standard deduction allowance of 30 per cent on Net Annual value to 40 per cent.
All being said, it is a matter of fact that this year’s Budget will be presented amidst a huge fiscal deficit and demand for large allocation of funds for healthcare and defence, both of which are the burning issues. Thus, Government also has little headroom to offer much tax relief to the taxpayers including the individual taxpayers. Nevertheless, the expectation is that this year’s Budget should be a ‘bold’ budget on policy reforms, to boost consumption and investment. A careful balance between tax collections and providing tax relief that has a positive spiral effect on the economy will do the trick. Hopefully, in the years to come, this budget may be seen as an important milestone in India’s journey to becoming a $5 trillion economy.
The author is National Managing Partner -Tax at Grant Thornton Bharat