Tax compliance made easier, calculating liability not so easy


By DM Deshpande

Changes proposed in direct taxes have evoked mixed response from stakeholders. The salaried and the middle class did expect that the government would cut taxes so that more money is put in the hands of people. This would spur consumption demand and help revival of economy that has seen record lows due to prolonged slow down. Since the government had recently announced, rather unexpectedly, huge cuts in corporate taxes, it was only logical that the reductions would be effected in personal taxes too.

  The Finance Minister has announced significant rate cuts, with the revenue foregone as a result estimated at Rs 40,000 crores for the year. However not every tax payer may be benefitted by the reductions in income tax slab rates because the cuts come with strings attached. That is, in order to avail rate cuts tax payer has to forego most of the other exemptions and deductions. There is no compulsion; a tax payer can still opt to remain with the old tax regime to avail all those exemptions. But in that case, he will not get the benefit of reduction in slab rates.

  Now, there is some speculation in the media as to which one of the two options is beneficial. The government, of course, feels that the new proposals with slab rate cuts will be advantageous to most persons. Some statistics released by the government also show that, perhaps, the government is moving in the right direction. Out of 5.78 crore tax payers who filed their returns in 2018-19, as many as 5.3 crores claimed exemptions of less than Rs two lakhs.

  This includes popular exemptions such as section 80C (PF, LIC premium, NSC and the like), section 80D ( medical insurance), section 80CCD (1B) additional deduction for NPS, interest paid on housing loan and Standard Deduction.  To put this in perspective, less than 10 per cent of the total tax payers claimed IT exemption of more than Rs two lakhs.  

  On the face of it, the new tax regime is positive for pensioners, tax payers without home loan or young professionals who have just started their careers. Yet it cannot be generalized. Deductions such as standard deduction, medical insurance may prove to be more advantageous to those who are in lower tax brackets even amongst the class referred to above.

  Irrespective of the amount claimed as deduction, whether it is Rs two lakhs or less, yet tax liability will have to be worked out (in both regimes) in order to find out what is beneficial to an individual tax payer. That’s what makes the task more difficult and time consuming. Those who are using the services of chartered accountants and tax experts will still need their services. In fact, some more tax payers may knock their doors for help.

  Without doubt, the government wants to usher in a new tax regime of lower rates with nil or at least fewer exemptions. That also explains the nudge to remove 70 exemptions from a total of 120 in one stroke. Some exemptions such as deduction for NPS, EPF will continue in the new regime. The Finance Minister has said, some exemptions will be there no matter how many times we say there will be no exemptions. In fact, the government wants to conduct a study to decide whether or not to retain certain exemptions. Till this is decided, how can one calculate the tax liability in the new regime? And the tax payer has to decide quickly which tax regime suits the best so that the investment plan can be made in advance.

  Pre filled forms, which shall be made available, will make the return filing easier.  There are some measures taken that are aimed at reducing the interface with tax bureaucracy. Easier compliance helps in many ways. Potentially, it can bring in more collections. Ease of doing business is linked with ease of tax compliance; so, positive here will help lift the index even higher.

  New proposal seem to be the beginning of baby steps towards long pending reforms in direct taxes. It would have been better if the proposals contained fewer slabs. Perhaps, fiscal constraints came in the way. Going forward, the Direct Tax Code (DTC) should be the guiding force to usher reforms in direct taxes. DTC itself has undergone several changes and refined to suit the needs of the economy and all stakeholders.   

The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.