Budget to offer fewer tax giveaways, keep reforms direction | The Financial Express

Budget to offer fewer tax giveaways, keep reforms direction

More PLI schemes, reliefs to low-income taxpayers on the cards.

budget, economy
There are a few factors that increase the chances of some concessions on the PIT front, to the lower strata of taxpayers. (IE)

Given the need to keep the solid pace of tax revenue growth and return to the legislated fiscal target without any further detour, Budget 2023-24 will likely be low on tax giveaways. A great degree of stability that has been brought about in the country’s taxation regime in recent years and the commitment to multilateral frameworks like OECD and G20 also reduces the scope for any substantive rejig of the direct tax structure in the Budget.

Yet, there could be some concessions in the personal income tax regime (PIT) aimed at low-income individual taxpayers, which may not necessitate much outgo from the budget in the final analysis. Since production-linked incentives are again the norm, more PLI schemes may be unveiled for sectors like furnitures, toys, chemicals, electrolysers for producing green hydrogen.

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Another measure that looks likely is extension of the deadline for new manufacturing units to start production to avail the concessional corporate tax rate of 15% (17% including cess and surcharge) by another year to March 31, 2025. A clutch of ‘green’ incentives may be in order too, including exemption to interest income from green bonds. Since corporate tax rate was cut sharply to 22% for domestic companies (25.17% including cess and surcharge, down 35.94% earlier) in October 2019 and the effective tax rate for large companies is 22-23%, another reduction in the corporate tax rate is highly unlikely. The government is concerned that the tax cut or companies hasn’t resulted in any spurt in investments so far. The share of corporate tax revenues in the the Centre’s gross tax receipts, however, has reduced in recent years.

There are a few factors that increase the chances of some concessions on the PIT front, to the lower strata of taxpayers. First, a feeble consumption revival being witnessed is largely due to high-end spending, with not enough support from the lower middle class and the rural segments. Tax benefits to the low-income population could also help offset the impact of rising inflation on them. The fact that the coming Budget is the last full Budget before the General Elections in 2024 is also a reason for giving some relief to sections of taxpayers.

Individual taxpayers are hoping for a higher exemption limit from the current Rs 2.5 lakh and higher deductions for interest paid on home loans. The concessional tax regime for individuals introduced by Finance Act, 2020 hasn’t found much favour with taxpayers and government officials have acknowledged this. It remains to be seen if the finance minister chooses to review the concessional structure and make it more attractive with a view to finally moving to a single regime.

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“As the disparity between the personal tax rates and corporate tax rates has widened over the years, it would only be fair if the concerns of the common man is allayed and the overall personal taxation system for individual taxpayers is made more sparing. This would help the government widen the tax net by paving the way for increased voluntary compliance,” said Sandeep Jhunjhunwala, Partner Nangia Andersen LLP.

But with the Centre’s fiscal position just about improving and concerns of an economic slowdown lowering tax collections, to what extent will finance minister Nirmala Sitharaman and her officials in North Block be able to lower tax rates and offer rebates is the key question.

“The Budget has to be seen in the larger macro-economic perspective of fiscal discipline. This may put constraints on spending plans by the government. However, if the growth in gross tax revenue of 25-30% is to be sustained, it would give some leverage on keeping the deficit under check,” said Samir Kanabar, Partner, EY India.

Gross direct tax collections have risen by 26% between April and December 17,2022 to Rs 13.63 trillion and expectations are that it would exceed the Budgeted estimate by close to Rs 4 trillion. But with inflation seen to be cooling and economic growth also likely to slow, the question persists how far this growth in tax collections will be maintained. The Centre is confident of keeping the fiscal deficit within the targeted 6.4% in FY23 and it is looking to reduce it to about 5.6% to 5.8% in FY24.

But as a partial relief, the Budget is expected to announce a common income tax return form, the draft of which was released by the Central Board of Direct Taxes in November 2022. It proposes to introduce a common ITR by merging all the existing returns of income except ITR-7. However, the current ITR-1 and ITR-4 will continue, giving taxpayers both options for filing their returns.

“The sunset date for commencing manufacture under Section 115BAB of the Income Tax Act (to be eligible for the concessional corporate tax rate) should be extended from current 31 March 2024 till 31 March 2025. This would encourage more investment in manufacturing sector and exports,” industry body CII had said in its pre-Budget memorandum.

Rohinton Sidhwa, Partner, Deloitte said that the government should clarify the implementation of various withholding tax provisions as the industry is grappling with various challenges. “Taxpayers faced practical issues on applicability and implementation of the provisions of Section 194-O of the Act,” he said. The section related to TDS provisions relating to ecommerce operators.

The rationalisation of capital gains tax, that former Revenue Secretary Tarun Bajaj had hinted at, also seems to be on everyone’s watch-list. Experts note it will benefit not only corporates but also individual taxpayers and will also help boost sentiments in the capital markets.

“The capital gains tax regime is quite complicated at present with different rates and holding periods for asset classes of equity, debt and immovable property. The government may look at how to rationalise the different time periods and rates. There has also been some leakage due to arbitrage opportunities,” Kanabar noted.

Industry is also hoping to get a long pending clarification on equalisation levy or the Google Tax as it is often called. “It is hoped that the government will clarify that the equalisation levy applies only to digital goods and services. At present, the way it is worded, it appears to also apply to physical goods and services. This has been a request for a long time,” said Sidhwa.

The status quo on taxation of digital services is however, expected to be maintained as experts point out that there is still work to be done and consensus to be achieved for BEPS Pillar 1, which is unlikely to be implemented this year.

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First published on: 06-01-2023 at 00:50 IST