Revival of the consumption cycle would be a priority for the Finance Minister while finalizing the Budget. In order to achieve this, he may choose to leave more disposable income in the hands of individuals. However, my sense is that the FM may choose not to alter the tax slab rates this time around, says Girish Vanvari, Partner and National Head of Tax, KPMG in India. In an exclusive interview with Sanjeev Sinha, he also shares his expectations from the Budget, and talks about the need to simplify the income tax regulations and whether tax deduction limit for housing loans should be increased or not. Excerpts:
1. Demonetisation has hit the common people hard and it is also an election time. In view of this, what kind of sops do you expect from the Finance Minister in the forthcoming Budget?
The expectations from the budget are running high considering the impact of demonetization and the upcoming elections. One can expect the FM to announce tax sops such as providing tax rebates for digital transactions, extending the tax holiday period for start-ups beyond three years etc to pronote thegovernment’s flagship programs such as ‘Make in India’, ‘Digital India’ and ‘Start up India’. The Prime Minister had already announced a few sops outside of the budget during his speech on December 31st by launching housing schemes for the poor, conducive finance arrangements for MSMEs (micro, small and medium enterprises) and announcing cash sops for expectant mothers, to name a few, and whether the FM plays to the gallery, introduces further sops and makes this budget a populist one, it remains to be seen.
2. Do you think income tax exemption limit will be raised or tax slabs changed in the Budget?
There has been a considerable debate on whether the tax slabs would be increased and deduction limits be raised to reduce the tax burden on individuals. Needless to say that revival of the consumption cycle would be a priority to the Finance Minister’s mind while finalizing the Budget. In order to achieve this, he may choose to leave more disposable income in the hands of individuals by introducing measures such as enhancing the deduction limits in 80C to, say, Rs 3,00,000/-, introducing deduction for investment in sector-specific bonds such as infrastructure and also an increased deduction on interest income from Rs 10,000/- to Rs 20,000/-, thereby reducing the effective tax rate. However, my sense is that the FM may choose not to alter the tax slab rates this time around.
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3. It is believed that income tax rates are very high in India and need to be lowered. What is your opinion?
Yes, the tax rates in India are indeed on the higher side when compared to the rest of the world. The government recognised this fact and the FM in his budget speech of 2015 stated the intent to reduce the corporate tax rate to 25% in a phased manner. It is important that the aforesaid reduction of the rate to 25% eventually should be the final effective tax rate(including surcharge and cess) once all exemptions are phased out.
On the personal taxes front also, one can expect the effective rates to go down through various deductions/exemptions that are made available in the coming years. However, one needs to be mindful of the fact that the ‘tax base’ would have to be wider than what it is today in order to give the government the fiscal room to reduce the tax rates.
4. Do you think the tax deduction limit for housing loans also needs to be increased as the current limit of Rs 2 lakh is insignificant given the ticket sizes of homes in big cities?
Absolutely, the tax deduction limit for housing loans need to be increased to a level that reflects the market realty. Increase in the deduction limits along with hopefully lower interest rates should assist more people to own homes and also revive the housing real estate market.
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5. There is also need to simplify the income tax regulations. What should the FM do in this regard?
On the corporate taxes front, the FM should lay out a clear road map on the manner in which various exemptions would be phased out and the transition to a lower corporate tax rate would take place. The government should also address the issues surrounding the indirect transfer of shares, and provide guidance on the manner of implementation of GAAR to eliminate the uncertainty surrounding the same.
On the personal tax front, the FM may consider realigning Small Savings Schemes and provide a direction to bring taxation of various products like NPS, Employee Provident Fund Scheme (EPFS), Private Pension, etc. at par. Similarly, Leave Travel Allowance (LTA) is eligible for tax relief for 2 calendar years in a block of 4 calendar years. The government may consider replacing the concept of calendar year with Financial Year (i.e. April–March) and further exemption should be available in respect of at least one journey in each FY. The LTA exemption may also be extended to include overseas travel, considering the rising trend and aspirations of the people.