Personal Finance

A move towards a flatter tax structure seems to be the Centre’s intent: Parizad Sirwalla of KPMG India

Satya Sontanam | Updated on February 09, 2020

In future, the tax structure may be simplified without any complexities of deductions and exemptions: Partner and Head, Global Mobility Services - Tax, KPMG India

In Budget 2020, significant announcements on personal taxation included introduction of a new tax regime (lower tax rates with no benefits of most deductions/exemptions), amendments to the definition of residency in India and removal of dividend distribution tax (DDT). Talking to BusinessLine, Parizad Sirwalla, Partner and Head, Global Mobility Services - Tax, KPMG India, said tax benefits should not drive an individual’s investments or savings. She also believes that going ahead, a flatter tax structure without any exemptions or deductions may be the only option. Excerpts:

Do you think the new tax regime is widely beneficial?

A flatter income-tax structure (without exemptions and deductions) for individuals has been on the cards for some time now. As per the government, almost 80 per cent of taxpayers hardly make use of the existing exemptions or deductions such as HRA (house rent allowance), LTA (leave travel allowance) and interest on housing loan.

There is no concrete answer on whether a taxpayer should opt for the new scheme or stick to the old scheme. A taxpayer should do his/her own customised mathematical calculations to see if he/she is better off under the new tax regime. For instance, if the taxpayer is claiming all the possible exemptions and deductions, he/she may be better off sticking to the old scheme. On the other hand, if a salaried employee is taking the benefit of standard deduction alone, he/she may have lower tax incidence in the new scheme.

With the introduction of the new tax regime, do you think savings under tax-benefiting instruments such as insurance premium will come down?

Financial/investment advisors generally recommend it’s not prudent to invest solely for tax benefits. We will have to continue to invest whether we get tax benefits or not, because it is for our future.

Further it appears that the intent is to move towards a flatter tax structure, whether for corporates or individuals. It is also believed that most of the exemptions and deductions will phase out soon. In the future, the tax structure may be a simplified one without any complexities of deductions and exemptions.

Taxation may not be the sole factor driving individual’s consumption or saving pattern.

With the tax-free employer contribution to retirement savings capped at ₹7.5 lakh pa, what other avenues do high-income salaried individuals have to save taxes?

Currently, an employer’s contribution towards retirement instruments such as the provident fund and the NPS (National Pension Scheme) is tax-exempt to an extent of 12 per cent and 10 per cent of the specified salary, respectively.

With (tax-free) contributions from employers now limited to an absolute amount of ₹7.5 lakh per annum, the change is certainly going to hit high-income salaried individuals. But there is very little legroom for any tax-planning in this case.

Most retirement schemes comes under the exempt-exempt-exempt category and the stated intent from the top (Central government) is to take away the exemption and keep the tax structure flat.

Is the disappointment of NRIs regarding the change in definition of residency valid?

Currently, non-resident Indians are not liable to disclose global assets or pay taxes on income earned outside India. As per the Budget proposals, the conditions to be eligible for an NRI/NRO (Not-Ordinarily Resident) status have been tightened.

Also, a new provision proposed in the Budget states that a citizen of India not liable to tax in any other country by reason of his/her residency/domicile/similar criteria, is deemed to be a resident in India, even without any physical presence in India. NRIs got worried that it would make their income earned outside India, too, taxable in India.

But the Tax Department later clarified that there is no intention of taxing Indian citizens who are bona fide workers in other countries including those in the Middle East, and that foreign income will be taxable in India only if such income is derived from a business/profession in India.

You still have to read the additional conditions and see whether you are a resident of India or not.

DDT has been removed and the tax liability on dividends transferred to shareholders. Your thoughts on how it will affect mutual fund investments...

Until now, dividends above ₹10 lakh was taxable in the hands of an 10 per cent. Now, there is no such ceiling and such income will be taxable as per the individual’s applicable slab rates.

So individuals might want to look at their investment portfolio if exempt dividends was earlier the key driver for them.

Published on February 09, 2020

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