Ever since, the commencement of its second term, Modi Government has showered benevolence on the corporate sector by giving relief in income tax but when it comes to personal income tax (PIT), it has not matched the expectations.
On September 20, 2019, Finance Minister (FM) Nirmala Sitharaman had announced steep reduction in the rate of corporate tax for “new entities” incorporated from October 1, 2019 in the manufacturing sector and start production by March 31, 2023 from the existing 25 percent to 15 percent. Such companies won’t have to pay minimum alternate tax (MAT) (levied on book profit of firms which have no taxable profit courtesy, exemptions and incentives).
Furthermore, the tax rate on existing companies was reduced from 30 per cent to 22 percent sans exemptions and deductions. These firms are also exempt from MAT. The small and medium enterprises (SMEs) with annual turnover of less than Rs 400 crore were already enjoying a preferential tax rate of 25 percent against 30 percent payable by large firms. Following the cut to 22 percent (albeit for all ‘existing’ firms), the preferential treatment for SMEs is gone.
Meanwhile, the companies were given a choice to either continue with the old regime viz. tax at 30 percent with tax breaks or go for the new one. For those deciding to continue, MAT was reduced from extant 18.5 percent to 15 per cent.
In the Budget for 2020-21, Sitharaman extended the benefit of 15 percent rate to “new” power companies also. Besides, “cooperatives” were made eligible for the 22 percent rate sans exemptions and deductions. The FM also abolished dividend distribution tax or DDT (levied @20 percent on surplus/profit set aside for distribution of dividend to shareholders). From April 1, 2020, dividend is taxed in the hands of shareholders.
In the 2022-23 budget, the government has extended the eligibility of 15 percent corporate tax to new (albeit manufacturing) entities which get incorporated before March 31, 2024 – against the existing threshold of March 31, 2023. It has reduced the surcharge on profits of cooperatives from existing 12 percent to 7 percent besides reducing MAT from existing 18.5 percent to 15 percent.
Coming to PIT, prior to 2020-21, a person having an income of Rs 2,50,001-Rs 5,00,000 per annum was required to pay tax of five percent, those earning more than Rs 5,00,000 but less than Rs 10,00,000 paid 20 percent tax whereas, someone having an income higher than Rs 10,00,000 paid 30 percent. With these tax rates, individuals enjoyed a plethora of exemptions and deductions.
The 2020-21 budget, even while retaining 5 percent tax for annual income in the Rs 2,50,001-Rs 5,00,000 range, on income higher than Rs 5,00,000, it levied: 10 percent for Rs 5,00,001-Rs 7,50,000; 15 percent for Rs 7,50,001-Rs 10,00,000; 20 percent for Rs 10,00,001-Rs 12,50,000; 25 percent for Rs 12,50,001-Rs 15,00,000. For income above Rs 15,00,000, the 30 percent tax continues.
As in case of corporate tax, individuals were given the choice to go either for the new regime sans exemptions/deductions or continue with the old regime with exemptions/deductions. The following two budgets viz. 2021-22 and 2022-23 have left the PIT unchanged.
On the face of it, with tax rates under different slabs being lower, it would appear the new PIT regime is better. But, considering that it comes without exemptions/deductions, the gain is illusory. For instance, under the old regime, a person having an annual income of Rs 15,00,000 and availing tax breaks of Rs 3,75,000 (Section 80C:1,50,000; Section 80D: 25,000; Section 24: 2,00,000), pays Rs 1,56,000 as tax.
Against this, under the new regime, he will have to pay Rs 1,95,000/- as as the benefit of lower rates is more than offset by withdrawal of exemptions/deductions. So, the 2020-21 budgetary changes have not made individuals any better. At the same time, after the steep cut in corporate tax rate in September, 2019, the extant PIT rates don’t enthuse them.
For annual income greater than Rs 15,00,000/-, the PIT at 30 percent is double than the corporate tax rate at 15 percent for a new manufacturing enterprise (when compared to the tax paid by an existing firm or 22 percent also, the former is much higher). Even in respect of individuals with annual income in the Rs 10,00,000/-Rs 15,00,000/- range, the applicable tax rates i.e. 20 percent/25 percent are higher than the corporate tax.
The individuals could gain from abolition of DDT. This is because on their dividend income, against 20 percent paid prior to 2020-21, levy of tax on such income in their hands will entail payment at a lower rate for instance, 10 percent for those earning in Rs 500,001/-Rs 750,000/- range. However, this is of little use as these earners hardly have any surplus to invest in shares.
Clearly, Modi – government has done much less for PIT payers. While, less tax on profits of firms is important for inducing them to increase investment, reducing PIT is no less crucial. In fact, in the contemporary context, when growth is hamstrung more by the demand constraint, the latter can be much more rewarding.
The FM should consider putting more money in the pockets of individuals by giving extra relief in PIT. This may be done by changing the tax structure to: 7.5 percent tax on income in Rs 5,00,001- Rs 10,00,000; 10 percent in the Rs 10,00,000 – Rs 1500,000/-, 15 percent in Rs 1500,000/ – 2000,000/- and 20 percent on above 2000,000/- (there won’t be any tax breaks).
Under this package, a person earning Rs 1500,000/- will pay Rs 104,000/- as tax which is significantly lower than the payout of Rs 156,000/- under the old regime. Apart from giving a massive boost to the demand, this will also propel assesses shift en mass to the new dispensation.
On the corporate front, the legacy of exemptions/deductions needs to be completely erased. According to the revenue secretary, Tarun Bajaj, already, 65 percent of the existing companies have switched over to the new regime of 22 percent sans exemptions/deductions. Hopefully, rest of the firms will also shift within an accelerated time frame.
Modi also needs to look into the extant regime for capital gains tax. The tax rate varies depending on the category of the underlying asset and the holding period. For instance, equity and equity mutual funds attract short-term capital gains tax (STCG) of 15 percent and long-term capital gains tax (LTCG) of 10 percent. STCG on most bond investments is at the tax slab the investor comes under. LTCG is either 10 percent or 20 percent, depending on whether it is a listed or unlisted bond or a debt mutual fund. For real state, LTCG is at 20 percent.
Such a highly differentiated tax structure is prone to misuse, evasion and protracted litigation. Irrespective of the asset an individual deals in and the holding period, the capital gains arising there from are an addition to his income in the relevant year. Logically therefore, tax should be levied at the rate applicable to the slab his total income (all sources put together) falls in.
To conclude, the government should rationalize the direct taxes main focus being on addressing the anomalies between PIT and corporate tax at one level and capital gains tax at another. Moreover, the tax rates should be low but free from exemptions/deductions.