The government should increase the Section 80G deduction limit from 10% to 30% for this year
By TV Mohandas Pai & S Krishnan
India’s second Covid-19 wave, with steeper rise in cases than the first, has adversely affected the lives and livelihoods of the middle-class, low-income group, and economically-weak sections.
Many have donated large sums of money for pandemic relief, and the society has largely taken care of the crisis. The government must appreciate this. Under the existing income-tax regime, an individual can claim deduction towards donations made to certain funds, charitable institutions, etc. However, the total deduction is restricted to the lower of the donation amount or 10% of the taxpayer’s adjusted gross total income. The revenue impact for the government from Section 80G deduction by individual/HUF taxpayers for FY19 is Rs 1,062 crore, about 1.1% of the total amount of incentives of Rs 95,377 crore for that year! The government should increase the deduction limit from 10% to 30% for this year only so that more may donate and use the deduction. Similarly, the annual tax deduction towards payment of health insurance premium of the taxpayer and family is inadequate. The government should consider doubling the limits under Section 80D.
The Income Tax Return Statistics for various assessment years, published on the CBDT website, reveal that salary income is the highest source of income reported by individuals over FY14 to FY18 (latest available data). The total salary income exceeding Rs 2.5 lakh, reported by all individuals in their income-tax returns filed in FY18, was Rs 19,28,620 crore. The average per capita salary income was Rs 7.94 lakh. The total income from business or profession exceeding Rs 2.5 lakh, reported by all individuals in their income-tax returns filed in FY18, was Rs 8,23,981 crore. The average per capita income from business or profession of individuals was Rs 5.14 lakh. It appears that business income taxpayers have much more leeway to write off expenses!
The Centre introduced a new lower-income-tax regime for individuals from FY21, in addition to the existing tax regime. Both regimes have separate tax slabs and rates. The existing tax regime has four slabs, whereas the new lower tax regime has seven tax slabs. The Finance Act 2020 provided individuals the option to pay income tax at lower rates if they do not claim specified exemptions or deductions. About 70 deductions and tax exemptions will not be available under the new lower tax regime.
Covid-19 has increased the health cost paid by taxpayers. The salaried class is deeply hurt by the increased medical expenditure during this pandemic, which cannot be set-off against their income for tax purposes, whereas the business class is able to offset much of this expenditure. As a measure of relief to the middle-class taxpayers, it is suggested that the number of income-tax slabs without specific exemptions or deductions be reduced from the current seven to four slabs (see graphic).
This will provide relief to a larger number of people by giving them more cash to manage the Covid-19 crisis and simplify the tax, while the impact on revenue will be minimal.
Many jobs have been created in the technology and the start-up sectors. These two sectors are expected to hire 4-5 lakh engineers this year. Including the jobs for the supply-chain and delivery, job creation could go up to 10 lakh this year. While 14 new unicorns so far this year took India’s tally to a total of 56, the year could end with 20 new unicorns. Sadly, India may become a digital colony because of the tax disincentives Indians face in investing in start-ups.
The government must incentivise Indian investment and create jobs by removing the blatant discrimination in the tax treatment of unlisted shares vis-à-vis listed shares. A tax regime as applicable to listed shares should be extended to unlisted shares. The holding period for unlisted equity shares should be reduced to 12 months to qualify as a long-term capital asset. The LTCG tax from unlisted shares should be 10% and the enhanced surcharge exemption should be extended to LTCG from unlisted shares also.
These measures will act as an economic vaccine for taxpayers, and the government should announce these measures at the earliest so that the middle-class taxpayers are left with more money to address the pandemic challenges.
Pai is chairman, Aarin Capital Partners, and Krishnan is a tax consultant