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

Proposals Related to some Procedural Aspects of Income Tax Administration in case of Individual Tax Payers in India

1.   There is considerable confusion prevailing over Source of Funds used to make Sec 80C deposits and Sec 54E deposits which results in long exchanges of clarifications and/or disputes, issuance of demand notices and appellate proceedings.

2.   The disputes are of the following kind : Income Tax Department asserts that

2.1  In case of Sec 80 C deposits, the deposit should be made out of income earned by the Assessee for that financial year and/or

2.2  In case of Sec 80 C deposits, the deposit should be made from the Bank Account of the Assessee ; deposit made by someone else (say, father) is not considered eligible for Sec 80C benefit.

2.3  In case of Sec 54 E deposits, the deposit should be made out of the specific Capital Gain amount and the onus of proving this lies on the Assessee.

Let me illustrate this point : If the assessee makes a capital gain of Rs.60 lakhs by selling property and then deposits these proceeds for a temporary period of 5 months in a Fixed Deposit to earn some money (on which he, of course pays applicable tax), then his subsequent deposit in Sec 54E Bonds before the expiry of the 6-month limit for doing so is not being accepted by many ITOs or is being questioned.

Their argument is that this is no longer the “Capital Gain” money since it has undergone change by having been "sullied” since it has been invested in FDs !

2.4  In case of Sec 54 E deposits, earlier, the Capital gains arising from sale of property could be invested in more than one property and the amounts so invested were eligible for capital gains tax exemption.

A change in rules has made this ineligible, with investment in only one property being allowed for claiming Capital Gains Tax exemption.

This is clearly counter-productive and reflects a vindictive attitude towards the assessee. It is well known that many times ancestral and long-held properties are sold to enable the assessee to buy multiple properties for distribution amongst multiple claimants like his children, or siblings etc.

In such a case, to deny him the benefit of the Capital Gains exemption would be clearly unfortunate and would tend to frustrate his purpose of selling his original property or encourage him to conceal the actual consideration to avoid tax.

To avoid all such disputes that arise from the above-enumerated situations, it is suggested that ample clarification be issued in the Act itself so that there is no scope for laboured interpretations in these matters. The proposed clarification may possibly be incorporated,  and read, as under :

In case of Sec 80 C deposits,  it is stated, for the sake of ample clarity, that the assessee will be eligible for availing tax benefits under this section so long as he/she makes the deposits in the specified instrument within the time period specified for a particular Assessment year and such deposits will not be called in question or investigated as to their source for the purpose of his availing the exemptions prevailing under law. To further clarify, there will be no denial of such tax exemptions on the ground that the deposit is not from his income for that year or that it is not from his bank account. The only caveat is that 2 persons should not claim benefit of a single deposit. Hence if a father makes Sec 80 C deposit in his daughter’s PPF Account either the father or the daughter can claim benefit of the same, not both.

In case of Sec 54E deposits, it is stated, for the sake of ample clarity,that so long as money equivalent to the capital gain has been deposited in the specified Sec 54 E instruments and within the permissible time limits, the assessee will be eligible for capital gains tax exemption and he/she is not required to prove any connection between the money so deposited in Sec 54E instruments and the money received by him as a result of the capital gains made.

It is further laid down that in case of Capital Gain from Property, investments in more than one property are eligible for capital gains exemption, and there is no restriction that investments made in only one property will be eligible for Capital Gains Tax exemption..

Rationale for the above 2 changes proposed in IT Act

What is the legislative intent of these exemptions, be it under Sec 80C or 54E ? It is primarily to reward the Tax payer  for his denying himself the use of monies that he has earned (by way of regular income) or money he has gained (as a result of capital gain).

In such a case, so long as the tax payer fulfils the requirement of depositing the money in the specified instruments within the specified time limit and for the specified “denial period”, it should qualify him for earning the exemption provided in the laws and there should no other requirement to test or interpret his intent. 

3.   Next we have the question of incorrect submission of PAN Number. The current law lays down that if a wrong or incorrect PAN Number is given, the ITO can impose a penalty of Rs. 10,000/- This is absolutely unnecessary and uncalled for. This provision simply does not recognise that there can be a genuine error, a handwriting mix-up or some such innocent thing. Hence the better thing is, just like in case of incorrect entry of password on many internet sites, repeated entries are allowed, at the very minimum at least 3.

Similarly, it is proposed that only if the PAN Number is submitted wrongly 3 times, the 4th such infraction should be slapped a fine of Rs.10,000/- This is NOT to suggest that wrong/incorrect PAN Numbers should be accepted on 3 occasions ; the suggestion, merely, is that NO PENALTY should be levied for the first 3 mistakes and the PENALTY should only be levied from the 4th instance onwards.

4.   There is a similar problem with Assessment year. If you enter the wrong Assessment Year whist making TDS payments or Advance Tax payments, then the same cannot be corrected !!! Unbelievable, but true. You are required to make another payment for the correct Assessment Year and then claim back the erroneous payment made by filing a claim for the same.  This is absolutely ridiculous. The Rules and the IT payment Software must allow for a correction to be filed  in the AY, as soon as such an error is detected by the Assessee.

5.   In the light of the above, it is further proposed that the existence of 2 “different year classes” Financial Year (FY) and Assessment Year (FY) should be done away with  and only FY should be used for all purposes. Since every FY is uniquely coupled with a corresponding AY, there is no sense in having two types of years. The average citizen are comfortable and familiar with FY and hence the proposal that there should only one type of year in IT dealings viz., FY.

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Proposal for Raising Sec 80C Deposit Limits to raise Cheap Development Funds for the Government

The basic Recommendation is  : Raise  the present exemption limit of  Sec 80C deposits  from the current Rs. 1.50 lakhs  to  Rs. 25 lakhs  as under :

a)    Rs. 1.50 lakhs can be deposited in any of the currently available avenues like PF, PPF, LIC, FDs of 5 years tenure and longer  etc.  (i.e. no change proposed)

b)    Deposits beyond Rs.1.50 lakhs upto Rs. 25 lakhs  can only be made in PPF  under the following provisions :

1.    For deposits from Rs.1,50,001 upto Rs. 5,00,000/- the interest rate paid in PPF deposits will be  2 percentage points less than the declared PPF rate for that year (which is applicable to the deposit of the first Rs.1.50 lakhs)

2.    For deposits from Rs.5,00,001 upto Rs. 10,00,000/- the interest rate paid in PPF deposits will be  5 percentage points less than the declared PPF rate for that year (which is applicable to the deposit of first Rs.1.50 lakhs)

3.    For deposits from Rs.10,00,001 upto Rs. 25,00,000/- the interest rate paid in PPF deposits 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.