Simpler tax regime | The Financial Express

Simpler tax regime

Over time, exemptions should be phased out with lower tax rates to create a less complex framework.

Budget 2023, income tax
To be sure, the bulk of the country’s tax filers—55.2 million in the assessment year 2018-19—are in the lower income categories and therefore account for a relatively small share of the total tax. (IE)

Finance minister Nirmala Sitharaman estimates that nearly half of the country’s taxpayers could shift to the new personal income tax regime in the next few years. This might seem ambitious, but not unrealistic, as the new regime is undoubtedly far more attractive. Following the changes announced in the Budget for FY24, it now offers the benefits of a bigger rebate of up to Rs 7 lakh and standard deduction for the salaried and pensioners and lower tax rates. For instance, while the tax rate on an income of between Rs 2.5-5 lakh was 5%, this rate is now applicable to the income slab of Rs 3-6 lakh per annum.

To be sure, the bulk of the country’s tax filers—55.2 million in the assessment year 2018-19—are in the lower income categories and therefore account for a relatively small share of the total tax collections. The data shows that tax filers, with incomes of less than Rs 9.5 lakh per annum, numbered more than 54 million or over 90% of the total. Given the many exemptions—especially Rs 2 lakh for interest on home loans—it could be a while before high-income taxpayers move to it. But the government is moving in the right direction. Over time, exemptions should be phased out altogether with the tax rates lowered to create a less complex and cleaner framework that helps reduce evasion. On average, the increase in tax filers every year is around 5%, according to officials, and the government should work to steer them towards the new regime.

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Meanwhile, the government’s big thrust on capital expenditure, which is set to increase by a stupendous 37% in FY24 to Rs 10 trillion, should help sustain the momentum in the economy. Despite the many pulls and pressures of Budget-making, the government has, to its credit, opted to spend much more on capex. Even if the increase in the ‘on-budget’ expenditure is a more modest at 27% after adjusting for Rs 1.3 trillion worth of loans to the states, capital infusion of Rs 30,000 crore into the oil marketing companies and around Rs 53,000 crore into BSNL, it is nonetheless a sizeable increase. Most of the funds would be spent on defence equipment, railways and roads & highways, all of which should help generate employment.

The capex is needed at a time when the economy is tipped to slow and the private sector remains reluctant to commit large sums to fresh capacity. Despite being meaningfully less-leveraged, companies are investing selectively and the animal spirits are yet to be unleashed. This is despite the fact that customs duties for a host of items remain high even though duties have been lowered on many products in the Budget. The government is doing all it can to assist companies to manufacture; the PLI scheme is a case in point. While manufacturers may be transitioning to a new high-technology environment and are short of adequately trained manpower, they must also contribute to skilling programmes.

Also read: Rs 15 lakh crore priority sector credit deployed to micro, small units in December 2022: RBI data

With corporate tax rates now at just 25% and the rate for greenfield ventures only 15%, India Inc must get a move on. Also, the coming fiscal should see interest rates softening, which should help borrowers. Even as the Centre continues to do the heavy-lifting, the states must also step up their capex spends. They need to use the long term interest-free loans that have been given to them; the progress so far in the current year has been somewhat tardy. The FM has sounded confident that states will spend more next year with teething troubles have been taken care of. They should live up to her expectations.

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First published on: 03-02-2023 at 04:30 IST