De-tax. Will the FM meet expectations?

The countdown has begun and everyone is eagerly awaiting the Budget day. This year, the expectation from the Budget is far more than in the earlier years, given the demonetisation move of the Government and the merger of the Railway Budget with the Union Budget. It is hoped that steps will be taken in the Budget to ease some of the pains of the common man.

Some measures such as higher interest rate for senior citizens on fixed deposits (with a lock-in period of 10 years) have already been announced. Further, to encourage digital payments, the government has announced a plethora of incentives, including discounts on purchase of petrol and diesel.

The government hopes that, in future, transactions will become increasingly digital, ensuring transparency as well as widening of the tax net. The Finance Minister’s statement in this regard may be pertinent to note: “Therefore, the future taxation level would be much higher than what is currently being collected. This would also enable the government at some stage to make taxes more reasonable which will apply to both direct and indirect taxes.”

Widening tax net At the same time, the government has also raised concerns on the small proportion of the population that files tax returns compared to the total population. In May 2016, the government had published data for individuals for AY 2012-13. According to this data, a total of 2.87 crore individuals had filed income tax returns for that year, but 1.62 crore of them did not pay any tax, leaving the number of taxpayers at just about 1.25 crore; the latter was close to 1 per cent of India’s total population of about 123 crore at that time. And of the 1.25 crore taxpayers, only 5,430 individuals paid income tax of over a crore.

The intent seems clear — the tax base has to be widened. The demonetisation drive and the subsequent measures taken by the government have unearthed a significant amount of black money in the system. This, in turn, led to the announcement of the Pradhan Mantri Garib Kalyan Yojana (PMGKY) for declaring unaccounted income in the form of cash or bank deposits.

The government had also mooted a simplified tax regime for corporate taxes last year, whereby tax rates would be reduced on a yearly basis and ultimately done away with. Simplification for individual taxes is also likely to be on similar lines. Given this environment of diverse and, at times, conflicting objectives, what can an individual expect from the Budget? Here goes the list.

First of all, the government’s attempt would be to lower the tax impact on the individual taxpayer while keeping the tax base intact. This can be achieved by lowering the tax rates and, at the same time, not altering the existing slab levels.

Secondly, there could be rationalisation of exemptions/deductions for the salaried class. For instance, standard deduction could be re-introduced to bring the salaried class on par with professionals. In case of the latter, expenses are allowed as deduction from their income.

Also, the government could consider certain recommendations provided by the income tax simplification committee chaired by Justice (retd) R V Easwar.

Among them could be a relief from interest on the delay in payment of advance tax in the case of new business started during a financial year or rationalisation of TDS rates and thresholds for withholding taxes.

Sops on the cards Also on the cards is an increase in the threshold limit for audit under Section 44AB of the Act for business/profession. To incentivise small traders/businesses to pro-actively accept payments by digital means, the government has announced a reduction in the rate of deemed profit of 8 per cent under Section 44AD of the Act to 6 per cent.

This is in respect of gross receipts through banking channels/digital means for FY 2016-17. Many more incentives are expected to be announced to promote digital payments.

Then, there’s likely to be measures to tighten investigation processes with the help of analytics to curb tax evasion.

The government may also consider laying down some guidelines to track down jewellery purchased out of untaxed monies and arrest the flight of untaxed monies overseas.

Procedural changes, namely, clear guidelines to income tax officers to prevent harassment and avoid multiple stages of litigation are likely. The government has already resorted to measures such as e-assessments, and more assessee friendly changes are expected. The government may also consider taxation of agricultural income in a phased manner and beyond certain thresholds. This is because a small population of the agriculturists are affluent and need to be brought into the tax net.

Given that the power to impose tax on agriculture rests with the States, how this can be achieved needs to be seen.

Also, procedures to align the Permanent Account Number (PAN) across multiple bank accounts are likely to be brought about.

It is very likely that tax withholding (TDS) provisions may be amended to apply on an aggregate interest from fixed deposits held with various bank accounts.

Lastly, continued efforts are perhaps being taken to make India a pensionable society.

A recent press release indicated that the government is planning a national security system for the poor and unemployed and if things materialise, a major announcement in this regard is likely to be made in the Budget. Tax exemption limits at the time of withdrawal of NPS may be further enhanced.

Taxpayers are closely watching and waiting to see if the FM will wave a magic wand to usher in good times, especially to the lower and middle class who have been impacted the most by demonetisation.

Tapati Ghose is Partner and Sowmya P, Manager, Deloitte Haskins & Sells LLP

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