The number of income tax payers in the status of individuals stands at 80,40,45,511 for the assessment year 2018-19 as per the information provided by the Administrative Handbook of the CBDT. They accounted for the collection of ₹4,73,121 crore out of a total direct tax collection of over ₹11 lakh crore.
Individual taxpayers are anxiously looking forward to the Budget. They start paying tax once their income exceeds ₹2.5 lakh. No doubt the initial rate is only 5 per cent, but the slabs have remained the same for three years at a stretch. The consumer price index inflation has been computed at just under 6 per cent. Are not these individuals in the lower income groups entitled to expect some relief in the rate of tax and the exemption limit by way of increase in the minimum taxable income?
Exemptions: In the 2020-21 Budget, the Finance Minister achieved a breakthrough by introducing an optional system of taxation. The taxpayer can secure lower rate by foregoing tax exemptions or pay higher tax and claim exemptions. The result is here to see. Most taxpayers preferred the exemption based higher tax.
There is, therefore, a crying need to introduce a more effective exemption-free option with lower tax rates. Probably, as former NITI Aayog Vice Chairman Arvind Panagriya suggests, the government may adopt a larger number of tax slabs. The focus on removing exemptions as far as possible should not be lost sight of. Well begun is half done.
Capital gains: The capital gains tax structure is riddled with complexities. Gains from debt funds are treated as long-term capital gains if the investment has been held for more than three years. These are eligible for indexation (inflation adjustment) and the post indexation gains are taxed at 20 per cent. On the other hand, interest on fixed deposits is fully taxable at the marginal rate applicable to the taxpayer. A 7 per cent interest on FD will actually mean a return of less than 5 per cent after a tax at 30 per cent. Why not revive the old practice of giving the choice to the investor to pay a flat tax of 10 per cent on the gains with no indexation or go for 20 per cent tax after indexation?
The Eradi Commission had given a useful recommendation. Capital gains should not be brought to tax as long as the sale proceeds are re-invested in productive assets. This applies to sale of immovable properties as can be seen from Section 54F of the Income Tax Act. The same can be extended for other types of capital gains.
Faceless assessment: When it was first introduced, taxpayers heaved a sigh of relief. However, experience with the scheme shows denial of natural justice. Appeals in the High Courts resulted in the faceless assessment being set aside with fresh directions to redo the assessments.
Inequality: The World Inequality Report once again suggests the rich are growing richer and the poor are not gaining. There is a case for raising the taxes for higher income groups. Dividend taxation should be exempt for small equity holders.
Global minimum tax: Multinational corporations escape huge taxation in the digital era. Most countries have agreed that such MNCs should be taxed at a minimum rate of 15 per cent of profit earned. The problem arises in arriving at the tax base for determining the profits. As the president of the G20, India has the unique opportunity to solve the problem and fix the global minimum tax.
Ramanujam is a former Chief Commissioner of Income-Tax; Sangeetha is a Chennai-based advocate
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