Budget 2020-21: On the personal income tax rate, the general expectation is that it will be reduced to boost domestic consumption.
India Budget 2020: Over the last two months or so, the finance minister has been receiving a number of proposals with diametrically opposite suggestions. While some have suggested not to tinker with personal tax rates others have made fervent appeals for reduction in personal tax rates, to bring them in line with the corporate tax rate. Expectations on corporate taxes are low because the government did reduce rates in September 2019.
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Changes to the corporate tax rate have made them competitive internationally. Expectations are that there could be a similar move on Dividend distribution tax (DDT). Dividends continue to be taxed at 20%, which seems very high in the present context. Expectations, therefore, soar in the background of tax rate reforms. Very few countries impose DDT these days. Even if they do, the rates are not so high. Argentina, for example, levies it at 7%, Brazil nil. DDT is not liked by foreign subsidiaries, as they do not get the benefit of that payment under tax treaties. Thus, reduction in DDT and bringing it in line with corporate rates will be high on wishlist.
Infra projects often run aground on viability aspect. This locks up considerable capital, without any benefit to anybody. The government should come out with proposals that enhance the viability of infrastructure projects. Many infra projects—power and road sector particularly—need to have separate SPVs (special purpose vehicle) for each project.
A tax consolidation regime (prevalent across the globe) can significantly decrease the compliance burden for taxpayer and the tax department, eliminate tax inefficiency and provide the requisite boost to the sector without any loss to revenue. Suitable anti-abuse provisions/guidelines should definitely be there to make sure there is no tax leakage.
On the personal income tax rate, the general expectation is that it will be reduced to boost domestic consumption. No doubt, personal income tax collections are buoyant; but a reduction in rates would be a bold step, given the public finance compulsions. What can certainly be expected is to have a rationalisation in rates. At present, the personal income tax slabs jump from 5% straight to 20% and 30% slabs. Multiple surcharges take the highest taxable rate to over 40%. It is time to rationalise these tax rates, at least at the lower end, and bring steps of 5% for different taxable income groups. This may further improve buoyancy and bring better progressivity, a hallmark of direct taxes. Such big rate jumps also present incentive to show lower income.
Under the present economic conditions, the government is looking to boost consumption and increase private investments. Real estate investments is the need of the common man. At present, the tax laws allow a tax rebate of only Rs 2,00,000/- as interest for a self-occupied property, if there is a housing loan. This seems low and may be useful to only those who are taking loan to buy a house of about `25-30 lakh. This in the context of metropolitan cities and some big cities is too meagre. The interest amount for such self-occupied property should be enhanced to at least twice the present allowable amount. This will boost the real estate sector and give a fillip to the economy.
Present capital gains tax laws are complicated and have multiple rates and varied nuances in laws. Rationalisation of difference between short-term capital gains tax (STCG) and long-term capital gains tax (LTCG) is also required. All these do not present an easy capital tax regime. In fact, the idea should be to put taxation of savings and capital gains on a rational basis.
The author is Senior Director, Deloitte India. Views are personal