The Finance Ministry is running short of their direct tax collection targets for the FY 2019-20. The government is unlikely to be able to fulfil the demands of big tax cuts.
Budget 2020: Amidst an economic slowdown with growth in GDP expected at an 11 year low of 5%, the government is expected to announce measures to boost domestic demand. At the same time, the Finance Ministry is running short of their direct tax collection targets for the FY 2019-20. The government is unlikely to be able to fulfil the demands of big tax cuts.
Here are some expectations from the union budget 2020:
Personal income tax: On the personal income tax front, the government may announce benefits for individual taxpayers, especially the middle-class taxpayers. The Finance Ministry has said that they are considering suggestions for the upcoming budget, and relaxing personal income tax rates have been one of them.
Salaried and the small scale entrepreneurs: The middle class represented by the salaried and the small scale entrepreneurs forms a chunk of taxpayers in the range of income from Rs 5 to 15 lakh. Presently, the rate of tax is 20% for taxable income above Rs 5 lakh and 30% for taxable income above Rs 10 lakh. Hence, the tax incidence on an individual earning up to Rs 10 lakh is quite high. A cut in the tax rate to 10% for income up to Rs 10 lakh or a tax rate of 15% for taxpayers in the range of Rs 5 to 15 lakh would leave more disposable income in the hands of the taxpayers.
High-income earners: With respect to high-income earners, in line with the recommendations of the taskforce on Direct Tax Code, the high rates of 30% can be levied on income from Rs 20 lakh to Rs 2 crore; and 35% for income above Rs 2 crore. However, this would be a challenge due to tax collections being below targeted tax revenues for FY 2019-20. The government may not be able to grant an across the board rate cut.
NBFCs, real estate, and infrastructure sector: Amongst others, various sectors have been demanding for sector-specific incentives such as the non-banking financial companies (NBFCs), real estate sector, infrastructure and power discoms. The sectors are also short of finances. The government too is running on a tight fiscal situation with lesser than expected tax collections and disinvestment collections. The government can consider issuing corporate bonds through top-rated PSUs. The government can also incentivise investments in bonds for income-tax benefits.
Public savings: From a public savings perspective, the limits for investment in government securities, LIC, mutual fund ELSS along with payments for children’s tuition fee and housing loan repayment are clubbed under section 80C with an overall limit of Rs 1.5 lakh. The limit under section 80C was last enhanced in the budget of 2014. With an increase in the cost of housing and education, the section leaves less room for savings. Hence, the government could consider enhancing the limit of deduction under section 80C.
The tax policy of the government can be used to incentivise and promote manufacturing activity. The government has announced an across the board rate cut for companies setting up new manufacturing facilities and for companies opting out of incentive regime. However, there are MSMEs consisting of partnership firms and Limited Liability Partnerships (LLPs) who are taxed at 30% (excluding surcharge and education cess). Similarly, sole proprietorships also set up MSMEs contributing to the manufacturing sector. These categories of taxpayers also merit a tax cut on the lines of a corporate tax cut for companies.
MSMEs investing in plant and machinery could be incentivised through a deduction under section 32AC. The Section was introduced in the union budget in 2013 to encourage investment in new plant and machinery by companies. The deduction was allowed in addition to depreciation allowance. The minimum investment threshold was Rs 25 crore. The benefit can be extended to MSMEs with a lower investment threshold and for a time horizon of 1-2 years.
The government could consider the above few steps towards generating cash flows and investment opportunities for the middle-income segment and the MSMEs.
By, Archit Gupta, Founder and CEO, ClearTax