India’s direct tax collections have shown significant buoyancy this fiscal, increasing 61 per cent between April to December 2021 compared to the same period last fiscal. It is desirable to keep this trend going, given that in recent years the balance has shifted towards indirect taxes, which are by their very nature regressive. While successive governments had already tinkered with rates and added deductions without materially expanding revenues, this government’s idea of a simplified tax regime for individual taxpayers flagged off in the 2020 Budget, was a good one. This new regime offers an individual taxpayer wider slabs and lower tax rates if she voluntarily gives up on claiming any of the 70-odd exemptions embedded in the Income Tax Act. Given the taxpayer-friendliness of the scheme, Finance Minister Nirmala Sitharaman would do well to look into why it has met with a lukewarm response so far, and iron out wrinkles in the upcoming Budget.

Three sets of fixes may help nudge salaried taxpayers, professionals and individuals running small businesses to make the switch to the new regime. One, many salaried assessees are loath to switch because they’ve locked into long-term financial commitments such as home loan EMIs, contributions to EPF or PPF and insurance plans, specifically to avail of tax breaks under Chapter VIA of the Income Tax Act. It would certainly not be desirable for the new tax regime to usher in such exemptions that essentially micro-manage individual investment decisions and lifestyle choices. But a blanket deduction on the lines of the standard deduction under the old regime can be considered, to cover expenses incurred towards employment and to take care of critical financial goals such as insurance and retirement. Many young employees looking to opt out of the old regime are constrained by their compensation packages being structured to minimise taxes under the old system, with archaic elements such as Leave Travel Allowance, HRA and compulsory EPF components. Employers must therefore be nudged to do away with such classifications while structuring pay. Two, to woo individuals and the self-employed to the new regime, a lighter compliance burden can be as big a draw as lower tax rates. Given that those opting for the new regime are giving up on their exemptions, they can be allowed to file ITR-1 and freed from the granular disclosure requirements required in other return forms. Exempting those opting for the simplified regime from random scrutiny assessments may also add to its attraction. Three, while the salaried have been given flexibility to choose between the old and new regimes every year depending on their tax outgo, the decision, once made, is irreversible for professionals and the self-employed. This needs to be remedied. 

The Centre and the tax department must also create awareness and highlight the advantages of the simplified regime through promotional campaigns. The attempt to simplify our complex tax law will inevitably lead to taxpayers needing less professional help on filings, so it is unlikely that tax advisors are going to proactively recommend the switch.

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