Personal Taxes

Why earnings tax charges should be revised

With the budget comes the hope and expectation of tax cuts, especially for the working class. The 2022-23 budget comes at a dangerous time – just as the economy was showing signs of recovery, Omicron turned all calculations on its head. As the variant spreads faster, it has forced countries to close borders, adding to supply-side pressures and increasing inflation. The incomes of millions of Indians have been badly hit, jobs have been lost, wage cuts implemented and many companies have been forced to shut down. Consumer demand has hardly returned to normal – the new variant is likely to further upset consumer sentiment and demand.

Direct tax reforms have been an on-going process with the Modi government, with a lot of emphasis on increasing compliance and the simplicity of the interface, including faceless reviews and so on. But it turns out that the white-collar, middle and lower-middle classes have gotten the raw end of the tax deal the government has worked out over the years. Corporate tax rates are among the most competitive in the world and there is no room for further rationalization – up to 15 percent for new manufacturing facilities. However, in relation to income tax rates, salaried taxpayers continue to be taxed at relatively higher rates.

The government introduced a new income tax regime into its budget last year, giving taxpayers a choice between the old and the new regime. The new regime offered a lower tax rate for those who waived tax deductions on selected savings and expenses. But as Sanjeev Kapoor, accountant and CEO at SP Kapoor and Company, a Delhi-based accounting firm, explains, in most cases people don’t want to switch from the old system because almost everyone has some kind of savings. “The PF is deducted from almost all assessments. Multiple income tax systems are creating chaos. If we talk about simplicity, there will be glitches in the system, excessive delays in filing notifications, and so on. If we (as a CA company) have difficulties, how can a person navigate the online filing system without help? ”.

The new tax regulation came into effect on April 1, 2020 (fiscal year 2020-21) in accordance with Section 115 BAC of the Income Tax Act 1961. Sections 80c and 80d benefits and interest deduction for home loans as per Section 24. Vikram Doshi, Partner at Price Waterhouse adds, “Two systems don’t work – they add complexity. We don’t need two regimes. There should be no confusion and uncertainty about taxation. ”There are strong arguments for further rationalizing personal income tax rates.

According to Arvind Panagariya, an economist and economics professor at Columbia University, direct tax reform is long overdue. “In the Indian system, income between Rs. 2.5 and 5 lakh is taxed at 5 percent. If I earn 4,99,999 rupees I will be taxed at 5 percent, if I earn 1 rupee more I will be taxed at 10 percent. It deters me from any job that goes beyond the income bracket. Unless I jump over a lakh rupee. If my income is 6,000,000 rupees, I would do whatever I can to keep it below 5,000,000 rupees – this system creates a great incentive to lie. In India, marginal and average tax rates are the same. Horizontal tax inequality must come to an end. If the income comes from a different source, it will be taxed differently. That must have an end.”

In terms of individual tax rates, India’s income tax rates are among the highest in the world. The effective tax rate for salaries over Rs 15 lakh is over 30 percent, while the corporate tax rate for new units drops to 15 percent. Even if fiscal considerations could weigh on tax cuts in the budget, the wage class that pays taxes and pulls an economy’s consumption levers has been left in the lurch for too long. The 2022-23 budget could be the time for a fresh start. Plus, exemptions have almost decreased over the years, and what’s left doesn’t quite reflect the current time – such as B. Transport allowance and household items allowance. There is a cap on allowances that does not reflect the realities of the market, and the cost of education is a huge expense for middle class Indians. The budget can be viewed holistically and the exceptions can be made more timely.

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