Income tax relief: Govt shelves big cuts due to huge revenue impact

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Updated: September 24, 2019 6:55:50 AM

The person added that the tax force reckoned that the loss of the revenue from its PIT reliefs could be made up for in three years by the resultant improvement in compliance.

The Centre is projected to raise Rs 7.66 lakh crore (gross) from corporate tax this fiscal while the PIT target is Rs 5.69 lakh crore.The Centre is projected to raise Rs 7.66 lakh crore (gross) from corporate tax this fiscal while the PIT target is Rs 5.69 lakh crore.

Last week’s corporate tax cuts involving annual revenue loss of Rs 1.45 lakh crore among the Centre and state governments have almost nullified the chances of an overhaul of the personal income tax (PIT) structure, as recommended by the tax force on Direct Taxes Code (DTC) in the current fiscal.

According to a person with direct knowledge of what the task force has advocated, the recommended changes on the PIT front would require governments to forgo a similar amount of revenue in a year as the recent tax breaks for Corporate India do.

The person added that the tax force reckoned that the loss of the revenue from its PIT reliefs could be made up for in three years by the resultant improvement in compliance. That would now appear a long period for the Centre, whose revenue deficit is seen widening at least in the short-term thanks to the latest largesse to companies that are aimed at giving a much-needed push to corporate investments.

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Many analysts have been sceptical of whether corporate tax cuts will have the intended impact on aggregate demand as it is unclear if companies would promptly use the higher post-tax earnings for new investments. Consumers, they believe, would have been amenable to PIT cuts.

What makes the PIT reliefs even more difficult for the government is that the estimated revenue loss will be a larger as a percentage of the overall PIT revenue base than the loss from corporate tax reliefs in relation to the relevant base.

The Centre is projected to raise Rs 7.66 lakh crore (gross) from corporate tax this fiscal while the PIT target is Rs 5.69 lakh crore.

The source added that the task force, which submitted the report to finance minister Nirmala Sitharaman recently, suggested that top PIT slab of 30% be moved to a “much higher income level” from the current Rs 10 lakh as part of a big slabs restructuring. Of course, it added the rider that a substantial amount of exemptions under Section 80C of the Income-Tax Act ought to be removed along with the slabs recast. Revenue foregone due to PIT exemptions and incentives stood at Rs 97,000 crore in FY19.

Another source said the DTC panel indeed recommended a 25% corporate tax rate with some incentives but advocated abolition of the surcharge. While last week’ steps brought down the effective corporate tax rate effective FY20 to 25.17% from 34.94% (for new units, the rate will be just 17.01%), the surcharge was retained. Probably, this was done to ensure that the Centre’s revenue hit is mitigated (proceeds of surcharges are not required to be shared with the states). “We need to get more of the self-employed and business owners to declare their actual income and pay taxes. A lower rate traditionally encourages such behaviour,” the first person said.

On the compliance front, the DTC report has observed that while there was a surge in IT return-filing after demonetisation and to a lesser extent in PIT revenue as well, this has tapered off in subsequent years. Demonetisation served at least one of its initial purpose of forcing people to file income-tax returns for the first time, the second source said, adding, for sustained compliance, a taxpayer would need to feel confident that paying taxes isn’t pinching.

In FY18, returns filed by all categories of taxpayers for income during FY17 (demonetisation year) grew by 27% to 6.74 crore. In comparison, return filings rose by 21% in FY17. On the PIT collection front, the FY19 saw a 13.5% growth after 19.9% and 21.5% in FY18 and FY17, respectively, indicating a slowing of the acceleration after note ban.

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