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Will The Government Overhaul The Direct Tax Code?

By Finserv MARKETS - Dec 31,2019
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Will the Government Overhaul the Direct Tax Code

Indian companies got an early Diwali present when FM Nirmala Sitharaman cut the corporate tax rate from 30% to a statutory rate of just over 22%. This measure was welcomed by the industry at large and stock markets jumped in celebration. However, individual taxpayers and citizens at large are still waiting for their turn. If all goes well, the Indian government could announce sweeping tax reforms in the upcoming budget based on the direct tax code overhaul.

The government constituted a task force helmed by Akhilesh Ranjan, Principal Chief Commissioner of Income Tax to review the six-decades old Income Tax Act and suggest amendments to bring it up to speed with the state of the economy. The panel submitted its report to the Finance Minister in August this year. While the report hasn’t been made public yet, it is expected that some of its suggestions could make it to the budget speech of FY 2020-2021.

The recommendations have kept the basic exemption limits unchanged as per the current rules:

  1. Rs 2.5 lakh for general taxpayers
  2. Rs 3 lakh for senior citizens over the age of 60
  3. Rs 5 lakh for super senior citizens over the age of 80

However, there are a lot of welcome moves in the offing for all taxpayers in general. The key recommendation is to widen the income tax slabs. What this means is that the current slab of 5% tax for income between Rs 2.5 lakh to Rs 5 lakh will give way to a standard 10% tax rate for any income above Rs 2.5 lakh but below Rs 10 lakh.

Revised Income Tax Slab 2019

Source: ET

This will provide relief to more than 27% of taxpayers who reported income between Rs 5 lakh to Rs 10 lakh. Earlier, these taxpayers were paying tax at the rate of 20% but now it could be just 10%. In numbers, almost 1.47 crore taxpayers are expected to move from the 20% slab to the 10% slab if these suggestions are implemented.

Moreover, those earning above Rs 10 lakh currently pay tax at the rate of 30% but this will be reduced to just 20% for all those earning between Rs 10 lakh to Rs 50 lakh. This move is likely to benefit 40 lakh taxpayers who will be moving from the 30% slab to the 20% slab.

Additionally, those earning above Rs 2 crore will be expected to pay income tax at the rate of 35% which is nominally higher than the 30% slab right now but the government is planning to do away with surcharges. The surcharge for those earning above Rs 2 crore a year right now is a humongous 25%.

Reform of corporate taxation

This is not all. The recommendations have called for surcharges on corporate profits too and charging a standard 25% tax rate across the board. Currently, only companies making less than Rs 400 crore a year are charged at a lower tax rate of 25%. The lower tax rates already cover more than 99.3% of industries in the country and if the Direct Tax Code is implemented, the leftover firms will join the fray too.

Will it happen?

Even though the tax cuts look tempting and much-needed, the endeavour is going to prove costly for the government. It is expected that the government will be losing Rs 1.75 lakh crore in the rejigging of income tax slabs for individual taxpayers. Already, it has foregone tax revenue of Rs 1.45 lakh crore in corporate taxes by reducing the tax rate. This could put the government in a fix as India’s fiscal deficit target is almost certain to be breached in this financial year and the government is hard-pressed to increase spending in public sector to boost consumption to fight the slowdown.

India’s fiscal deficit target

Source: Business Standard

Even as the government battles the fiscal math, it does need to boost consumption and it is being argued by experts that the easiest way to do that is to cut individual taxes to leave more money in the heads of the consumers. With the next budget in sight, the FM might just have to pick and choose the tax-cuts to balance consumer spending growth and fiscal responsibility.

If the tax cuts do happen, Indians can be expected to start consuming and investing more. As the markets rise, mutual funds are seeing increased flows of funds through SIP and lump sum investments by individuals chasing high returns. One of the ways to do it is to use the Finserv MARKETS platform which offers mutual funds accessible via minimal paperwork and zero commissions.

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