Budget 2019 - Some Proposals on Personal Income Tax

Last year’s Budget was a big disappointment for the Middle Classes and if the NDA Government wishes to win back its core constituency of middle class and the young, aspiring millennial,  it can partly achieve this through the Union Budget by the following measures :

1.     Raise Minimum Tax Slab from Rs. 2.5 Lakhs to Rs. 3.0 lakhs

This will benefit All Tax Payers as well as those on the threshold of paying taxes,  from Rs. 2500/- to Rs.15,000/- a year (5 %  to 30 % Tax Slab)

Assuming a median figure of Rs. 5,000/- (as tax payers are maximum in the lower tax slabs of 5 % & 10 % IT) this means a Revenue Loss of  Rs. 5000 X 6.84 Cr = Rs. 35,000/- Cr

2.   Raise Maximum Limit for Sec 80C benefits from Rs. 1.5 lakhs to Rs. 2.0 lakhs

This will benefit All Tax Payers as well as those on the threshold of paying taxes,  from Rs. 2500/- to Rs.15,000/- a year (5 %  to 30 % Tax Slab)

Assuming a median figure of Rs. 6,000/- and number of tax payers benefiting as 60 % of 6.84 Cr taxpayers (since all may not or may not be able to take this benefit) this means a Revenue Loss of  Rs. 6000 X 4.1 Cr = Rs. 24,000/- Cr

The above 2 measures will get a huge shout from the middle and higher income class citizens and give them a sense of compensation for the neglect they feel they have suffered in the past 2 years of Budget-making.

3.  Raise Sec 54 E Savings Limit for Capital Gains Amount from Rs. 50 lakhs to Rs. 1 Cr and simultaneously REDUCE Interest rate of REC Bonds & other eligible instruments to 4.25 % from current 5.25 %

This is only an inflation adjustment as the limit of Rs. 50 lakhs was fixed well over a decade ago.

Such a measure will benefit all those making capital gains.

It is difficult to estimate the likely impact on Revenue on absence of any data with the author ;  however,  however Government may not have a big revenue loss owing to proposed reduction in Interest rates.

This move will be welcomed by all real estate investors and may,  actually,  help increase the “white component”  of transaction even more,   which will have many  other cascading benefits.

4.  For Salaried employees Scrap all Tax-free allowances like HRA, LTA, Fuel & Drive Allowance and Education Allowance and,  in lieu of the same, compensate them by raising the STANDARD DEDUCTION to 25 % of GROSS Annual Salary  subject to a minimum of Rs. 40,000/- and a maximum of Rs. 1,75,000/-50 lakhs.

This will be a major Tax Simplification Reform as it will do away with a multitude of tax exemptions that often get misused, particularly HRA & LTA, and the raising of the Standard deduction is largely a “compensatory adjustment”  and not a beneficial one.

It is estimated that there will be no significant revenue impact of this measure ; however, based on actual impact found, the figures can be suitably revised in the 2020 Budget.  This fact should be announced in the 2019 Budget itself.

5. Introduce a unique tax support to those undergoing Professional courses like Engineering Medicine, Law to begin with

The proposal is - 50 % of the  fees (Academic Fees only) paid for such courses (not the Fees billed but the actual Fees paid net of any scholarship, grant or financial support) will be tax deductible in 5 equal instalments in the FIRST five years of the person’s income, post-acquisition of the qualification.

This will benefit all those going in for higher education and address the needs of the student / young professional community in the budget,  directly,  for the first time.  The gradual introduction also allows government to calibrate the extent of support based on actual revenue loss discovered.

It is difficult to estimate the likely impact on Revenue on absence of any data with the author

Such a provision will draw enthusiastic support from students who are aspiring for higher education but are not well off and have to beg & borrow to be able to pay for the same.

6.  Drop the requirement for the Tax Payer to fill in Assessment Year in any and all Tax Forms – let him/her just enter Financial Year

Financial year is so much easier and clearer for the average individual tax payer to understand - ; let the software translate that into the appropriate Assessment Year for Tax department’s internal processing purpose.  In fact,  currently when you want to pay TDS or Advance Tax,  you are asked to enter Assessment Year and the software displays a “flashing notice” saying “Please Note - this Assessment Year means this Financial Year”.  Hence it is clear that the software is capable of translating AY to FY ; it can as well translate a  FY entry to the corresponding  AY figure.

 

This will be a huge relief to individual taxpayers who often make mistakes while entering this information while paying TDS,  Advance Tax and Self-Assessment Tax  and as  a result,  their tax payment gets credited to the wrong year – recovery of which is a long, complicated and  irritating procedure.

This measure has no revenue impact.  It is part of the ongoing effort  for making the Tax Department user-friendly and reducing errors in tax filing.

           

7.  Increase the time for correcting  “erroneous PAN entry  in Tax Payment Challans”  to 60 days from current 10 days or so  and make the process simpler and do away with any penalty for such erroneous entries.

This will be a huge relief to individual taxpayers who often make mistakes while entering this information,  either a typographical error or simply due to hurry or carelessness.  Very often,  such mistakes are discovered much later during internal audit or some kind of reconciliation activity etc. ; hence the suggestion to increase the time limit for correction. 

This measure has no revenue impact.  It is part of the ongoing effort  for making the Tax Department user-friendly and reducing errors in tax filing.

8.     Simplify Rules for  TDS for payment of rent beyond Rs. 50,000/- to NRI Landlords so that TDS  Payments can be made as in the  case of landlords who are Resident Individuals  and do away with requirement for obtaining TAN Registration &  filing of  TDS Returns which is very cumbersome & also expensive as it requires professional help from a CA.

This will be a huge relief to tenants who are simply not geared to follow so many rules and requirements for getting TAN Registration and filing TDS Returns.  It will also save them the cost of CA Fees.

This measure has no revenue impact.  It is part of the ongoing effort  for making the Tax Department user-friendly and reducing errors in tax filing.

Mumbai

30  December,  2018

Proposal for Raising Sec 54E (Capital Gains) Deposit Limits to raise Cheap Development Funds for the Government

The present exemption limit of Rs. 50 lakhs of deposit in Sec 54E instruments was fixed over a decade ago and,  since then,  there has been a tremendous increase in property prices (land or buildings) and this makes the present limit  very unrealistic and  unfair to  the individual tax payer.

In the light of the above, the basic Recommendation is  : Raise  the present exemption limit of  Sec 54E  deposits  from the current Rs. 50 lakhs  to  Rs. 10 crores  as under :

a)    Increase the Rs. 50 lakhs deposit limit to Rs. 1 crores in any of the currently available avenues like REC Bonds etc. as per present practice for obtaining Capital Gains Tax Exemption  (i.e. an increase of Rs.50 lakhs benefit to the tax payer)

b)    Deposits beyond Rs. 1 crore upto Rs. 10 crores  can only be made  under the following provisions :

• For deposits from Rs.1,00,00,001 upto Rs.2,00,00,000/- the interest rate paid in Sec 54 E instruments  will be  2 percentage points less than the prevailing rate for that year (which is applicable to the deposit of the first Rs.1 crore) 

• For deposits from Rs.2,00,00,001 upto Rs. 5,00,00,000/- the interest rate paid in Sec 54 E instruments  will be  4 percentage points less than the prevailing rate for that year (which is applicable to the deposit of the first Rs.1 crore) 

•  For deposits from Rs.5,00,00,001 upto Rs. 10,00,00,000/- the interest rate paid in Sec 54 E instruments will be   NIL.

c)    As can be easily understood,  the government will get a huge cache of cheap and almost NIL cost funds for the price of foregoing some taxable income (a fair part of which it was losing anyway because people may have been avoiding declaring the same to avoid / evade  paying income tax).

d)    Even more important,  the deposit of so much money in government coffers means that development works can be tremendously speeded up without the government running up huge deficits because these funds are coming at substantially lower costs.

e)    Finally,  the mopping of so much money from individuals will have a salutary effect on inflation that is fuelled by excess of money supply in individual hands.

ONE CAUTION

     Anyone making large deposits for Capital gains should not be questioned, interrogated, investigated or hounded for doing so.  The very fact that he/she  is placing money in a legal instrument is a big gain for the legitimate economy and probing beyond that will be counter-productive.  

     Of course,  while making such deposits,  the capital gains claimed has to be explained in terms of giving details of the transaction which yielded such capital gains and asking for necessary details of that transaction is perfectly okay.  But that is where it must stop. There should be no automatic imputation of "illegitimacy" simply because Capital gains amount deposited is large.