Why the new optional tax regime could adversely affect dwindling savings

The government's proposal to introduce new optional tax regime without exemptions and deductions will adversely effect the savings in India, according to experts.

Finance Minister Nirmala Sitharaman in Budget 2020-21 provided option to personal income tax payers to remain in existing tax scheme with exemptions and deductions or opt for a new simplified tax regime with lower tax rates but without exemptions and deductions.

NIPFP professor N R Bhanumurthy said as the economy is slowing down due to fall in demand across the segments, the government has tried to provide stimulus by cutting direct tax rates (both on personal and corporate incomes).

"Although marginally, this could help in reviving demand...This could have impact on households' savings as reduction in tax rates is accompanied by elimination of deductions for tax exemptions," Bhanumurthy told PTI.

According to reports, over the past six years, India's savings rate has been considerably declining. In 2012, the overall saving rate in India was around 36 per cent but it is now down to 30 per cent.

Noting that as the savings are already dwindling, there was expectations of having additional tax savings bond, Bhanumurthy said, "But, the Budget has come up with measures that could result in exactly opposite impact".

Commenting on the proposal, eminent economist and former Union Minister Yoginder Alagh said, "it (proposal) will definitely reduce savings incentives".

Rohit Azad, assistant professor at JNU, said due to this proposal, savings rate may fall but that is not a bad thing during slowdown.

"But, what is more egregious is the impression created that the tax burden will go down whereas in net terms, for the middle and lower middle classes it will, in all likelihood, not go down," Azad said.

The finance ministry expects at least 80 per cent of the taxpayers to move to the new income tax regime, Revenue Secretary Ajay Bhushan Pandey had earlier said.

Under the new tax proposal, people with an annual income of up to Rs 2.5 lakh will not have to pay any tax. For income between Rs 2.5 lakh to 5 lakh, the tax rate (as earlier) is 5 per cent.

Further, those with an income of Rs 5 lakh to Rs 7.5 lakh will have to pay a reduced tax rate of 10 per cent; between Rs 7.5 lakh and Rs 10 lakh 15 per cent; between Rs 10 lakh and 12.5 lakh 20 per cent; between Rs 12.5 lakh and 15 lakh 25 per cent; and above Rs 15 lakh 30 per cent.

Budget 2020: Scheme on I-T disputes won't cheer Vodafone and Cairn Energy

The finance minister announced a new scheme ‘Vivad Se Vishwas’ in the Budget, to end all pending income tax (I-T) disputes. Tax experts, however, say this will not attract big cases such as Vodafone and Cairn Energy, given the government is seeking 100 per cent of the tax demand upfront by March. Nevertheless, the schemes has waived off penalty and interest.

“We have to wait for details of the scheme, as only the announcement has been made. However, to expect 100 per cent of the tax demand to be paid, particularly in the context that many of these demands are highly controversial, does not appear practical and, as such, the scheme does not seem appealing,” said Ketan Dalal, managing partner of Katalyst Advisors. “Also, to expect taxpayers to avail of this scheme by March end, given the ongoing cash flow strain overall, seems impractical.”

Under the proposed scheme, a taxpayer would be required to pay the full tax amount by March 31, 2020. Those who avail of this scheme after March 31 will have to pay some additional amount. The scheme will remain open till June 30. The finance minister said any taxpayer, whose case appeals are pending at any level, could benefit from the scheme. The finance minister added that in the last Budget, ‘Sabka Vishwas’ scheme was brought in to reduce litigation in indirect taxes. This scheme resulted in the settling of over 189,000 cases.

At present, she said, there are 483,000 direct tax cases pending in various appellate forums i.e. Commissioner (Appeals), ITAT, High Court, and Supreme Court.

Govt mulls personal I-T relief while scrapping some exemptions: Report

Government is considering tax relief for individuals as it looks at measures to accelerate consumer demand and boost economic growth, people with direct knowledge of the matter said.

Prime Minister Narendra Modi’s government is mulling a proposal to hike the taxable income limits, especially the 1 million rupee slab, which attracts a 30% rate at present, the people said, asking not to be identified as the discussions are private. The move will be accompanied by scrapping some tax breaks, including the one offered on house rent payments and interest earned on some bank deposits.

The measures may form part of the federal budget to be unveiled in February, the people said. A spokesman for the finance ministry couldn’t be immediately reached for a comment.

If the government tinkers with personal taxes, it will add to the list of measures taken in recent months to boost growth that’s expanding at the slowest pace in nearly six years. Apart from last month’s cut in corporate taxes, the government has also rolled back a levy on foreign funds, injected $10 billion into banks, relaxed foreign direct investment rules, and merged state-run lenders.

A steep reduction in corporate tax rate to 22% meant companies pay taxes at a lower rate than many individuals who are in the top 30% rate bracket. That’s raised the clamor for a relief in personal income tax rates.

As Finance Minister Nirmala Sitharaman aims to narrow the fiscal deficit to 3.3% of the gross domestic product this year, the government has limited fiscal space for fresh giveaways after the $20 billion corporate tax stimulus. It’s now banking on companies and individuals to boost consumption and add to revenue collections.

Personal tax kicks off on income above 250,000 rupees a year, levied at 5%. Top marginal tax rate in India is 42.74% for income above 50 million rupees. That’s higher than the Asia average of 29.99%, according to data compiled by KPMG. Only about 5% of the population pays taxes and the country’s tax-to-GDP ratio of about 11% ranks lower than the global average.

FM Sitharaman hints at corporation tax cut, silent on FPI surcharge

Finance Minister Nirmala Sitharaman on Friday assured industry of cutting the corporation tax rate to 25 per cent across the board once it gets comfort on revenues, and that direct tax laws would be simplified after the task force submits its report later this month.

Addressing members of the Confederation of Indian Industry (CII), the finance minister said she would be travelling to tier 2 cities to understand the issues of harassment faced by corporates from tax officials.

Sitharaman talked about the cordial relationship between North Block and Mint Road. “We have an atmosphere of certainty and cordiality between the RBI (Reserve Bank of India) and the government," she said, adding that the current high level of synergy between the two is helping incentivise investments.

"It is our intent to reduce tax on corporates...There is no second thought on this," she said. Less than 1 per cent of the large corporates now attract 30 per cent corporation tax, with the rest coming down at 25 per cent. The government would consider a uniform 25 per cent tax rate for all categories of corporates after there was comfort that tax revenues were on the upward trend, she said.

A technology-driven platform will be set up wherein cases of harassment can be uploaded, either with and without disclosing identity, she said. She did not rule out the possibility of reviewing some of the milestones in relation to infrastructure. In particular, projects with a bearing on the core sectors and job creation may be brought forward.

"For instance, incentivising affordable housing is likely given its impact on the core sectors," she said.

She also assured the industry of reviewing the criminal penal provisions on corporate social responsibility (CSR) contained in the recent amendments to the Companies Act, passed by Parliament. She said CSR notices with retrospective effect “were unacceptable” and she would put a stop to these.

Meanwhile, capital market participants and foreign institutional investors on Friday presented a charter of demands to Sitharaman, which included a rollback of surcharge on FPIs, review of dividend distribution tax and lowering of LTCG tax, in a bid to shore up investors' sentiment.

Sources said Sitharaman gave a patient hearing to them but restrained from making any firm commitments.

The meeting was part of the exercise being undertaken by the minister to firm up steps to increase investments and boost economy, which is showing signs of slowdown. During the meeting, it was also suggested that employees' provident fund should increase its exposure in the stock market, which in turn would improve liquidity, industry and official sources added.

There was also a suggestion that the long-term capital gains (LTCG) tax be abolished or at least reduced. They suggested that higher surcharge on income beyond Rs 2 crore, which was imposed in the Budget, should not be applicable on FPIs. The government's decision on surcharge had impacted the market.

FPIs who participated in the meeting include Goldman Sachs, Nomura, Blackrock, CLSA, Barclays, and JP Morgan

GST Council meet: Realtors get two options to tax under construction house

Real estate developers with unsold housing inventories can now choose either the old rate or the new one if the project is still under construction on March 31. This option was given on Tuesday at the Goods and Services Tax Council meeting.

The decision also cleared the air on possible loss in input-tax credit for projects that are underway if realtors choose the new rate structure. The Council approved a formula, based on four parameters, which will determine the extent to which tax credit can be claimed on purchases for constructions.

The Council also decided to term a project with up to 15 per cent commercial space as a residential property for the purpose of the new rate structure.

“Developers will get about 15 days to a month to decide on the option, but the exact time would be decided over the next few days in consultation with states. This is precisely to solve the problem of unsold inventory. Realtors can now weigh the option that benefits the market the most,” said Revenue Secretary Ajay Bhushan Pandey on Tuesday.

The four factors would be: Extent of completion of the project, extent of booking of apartments by buyers in the project, extent of invoicing of purchases for that project, and the proportion of residential space in the project.

Using the formula, income-tax credit would be reversed or be usable on a proportionate basis, said Pandey.

If the income-tax credit derived from the formula exceeds what is claimed till March 31, the developer would be eligible to claim the difference. If the derived value is less, the developer would need to reverse a part of the credit. 

No amount of the income-tax credit will lapse if this formula is used, officials said. Experts welcomed the decision, albeit with a rider of uncertainty about cost escalation.

M S Mani, partner at Deloitte, said: “The pragmatic move to segregate under construction projects from new projects would provide relief to builders who were worried about the loss of input tax credit.” “Providing such option would be beneficial for those developers who had already factored the entire input credits of the project while arriving at the sale price and in many cases these benefits may already have been passed on to customers,” said Pratik Jain, partner, indirect tax, PwC India. Developers would need to do the required math to arrive at the right decision on the option. Many of them welcomed the decision.

“This is a developer-centric decision, which will help the real estate market. Realtors are likely to retain the old rate structure for projects nearing completion, while opt the new one for projects just begun,” said Parth Mehta of Mumbai-based Paradigm Realty.

For projects that begin work after April 1, the new rate structure would apply without any relaxation, with a mandate to purchase at least 80 per cent of inputs from registered dealers. 

The new rate structure reduces the rate on affordable housing from 8 per cent with input-tax credit to 1 per cent without input-tax credit, and for other houses from 12 per cent with input-tax credit to 5 per cent without input-tax credit.

Houses costing less than Rs 45 lakh, with space of 60 square metres in metros and 90 square metres in non-metro locations, would be termed affordable, the Council decided in a meeting in February.

“Buyers would expect overall reduction in prices and may want to understand the basis of revised pricing. Industry would need to be cautious of anti-profiteering provisions and do a detailed analysis for the ongoing projects,” PwC’s Jain added.

Builders would need to calculate and assess both the options on a project by project basis to decide what suits better. A single developer building multiple projects has been allowed to avail different rate structures for different projects.

For those under construction project owners who opt the old rate structure, the input-tax credit can be set off against tax liability in the normal sense.