Budget 2020 proposed a new tax system under which taxpayers who are willing to let go of deductions and exemptions will be taxed at lower rates. The FM said the new system will simplify taxes for common people as they wouldn’t have to distil their incomes through exemptions and deductions but offer the entire income to tax at a much lower rate.
The move would have been great if it was tax neutral or left the taxpayers richer for giving up these exemptions. This would have also made the investment universe tax agnostic giving financial products a level-playing field. But the new tax system has not only increased the number of tax slabs that only compounds the confusion, but may also leave less in the hands of the taxpayers. “Rather than providing any substantial benefit to the taxpayers (a lot of taxpayers use exemptions and deductions to reduce their tax outgo), they have added to the confusion. They will have to do the assessment every year to understand their tax liability under the two regimes and opt for the one which is providing them more benefits. As not many people will be able to do the assessment themselves, they may have to take the help of the tax experts,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.
Our analysis shows that not many taxpayers will benefit by switching to the new regime despite the fact that the tax slab rates are lower. The new tax regime proposed to do away with the various deductions, including house rent allowance, Section 80C, Section 80D and so on, available under the current regime, which may effectively increase the tax liability for some rather than reducing it (see How much tax do you pay on your income on the next page).
The new tax system may not lower your tax liability, but if you are someone who doesn’t avail most of the exemptions and deductions, it may help. “The new system will be adopted by entrepreneurs, self-employed people and retirees as it provides more freedom to taxpayers. The various deductions, including under Section 80C, is suited for a particular segment of the salaried class and not everybody,” said Shyam Sekhar, chief ideator and founder, iThought.
Even if you are someone who doesn’t avail of any benefits, sit with an expert to understand your tax liability under both the systems because you may have limited flexibility to hop between the two systems.
We reached out to experts to get clarity on the matter and what we understood is that those with business income may not have the flexibility to decide each year. “An individual taxpayer will have to do the assessment every year to understand which regime is more beneficial. The same option though is not available to those with business income. They can make the choice only once, ” said Gautam Nayak, a chartered accountant. Kuldip Kumar, partner and leader, personal tax, PwC, agreed. The flexibility may be available only till such time that the scheme matures as the long-term plan is to do away with exemptions and deductions, Kumar added.
The government has also abolished the dividend distribution tax deducted by the companies and mutual funds before paying dividend but have instead made it taxable in the hands of the taxpayers. This may actually increase the tax paid on dividend income by those who are in the higher tax brackets.
Some experts were disappointed that the budget didn’t remove the tax arbitrage in financial products by way of taxability of capital gains . “The government could have used the budget to take a look at the capital gains and made both the tenure and tax rates uniform across asset classes. It could have improved the investment culture without really affecting revenue,” said Sekhar.
The changed definition of non-resident Indians (NRIs) didn’t go down well either. The budget has reduced the number of days spent in India from 182 to 120 days for a person to get the NRI status. “This move will disincentivize people from spending more time in India. Businesses are mobile and with a view to attract entrepreneurs to India, the FM should consider restoring the prior threshold.” said Shefali Goradia, parnter, Deloitte India.
The budget didn’t announce big-bang reforms and that was expected but it’s important to understand whether porting to a new system will make sense for you or not. Take the help of an expert if you need to.
