Jyoti Swaroop Mohanty

Income Tax Cut this Diwali Season

Jyoti Swaroop Mohanty
Nov 5 · 3 min read

The government has asked the Central Board of Direct Taxes (CBDT) to make the Income Tax Act simpler, with a focus on easing the tax and compliance burden on individuals, simplifying tax brackets to provide relief to middle-income taxpayers, and doing away with excess surcharges that add to the tax burden.

As the economy is suffering from its lowest demand rate in different sectors. Prime Minister Narendra Modi led NDA II government is trying to find out all alternatives to grow demand in respective sectors which will revive investment. Earlier the government has asked the bank employees to make strategies and give ideas to construct a $5 trillion economy for the Indian market till 2024.

CBDT-member Akhilesh Ranjan-led panel has recommended introducing a 10 percent tax rate slab for annual income between Rs 2.5 lakh and Rs 10 lakh followed by a 20 percent slab for the Rs 10–20 lakh income bracket and a 30 percent, or higher, slab for higher income levels.

Diwali festive is around and is the time for the extra bonuses and gifts from the companies and corporate firms to its employees and stakeholders. It is a time for investment for every household from distributing gifts to buy gold and clothes. It’s a season for investment. In such festive, FM Nirmala Sitharam is in a mood to let everyone’s pocket filled.

The draft legislation on the new Direct Tax Code (DTC) was submitted to Finance Minister Nirmala Sitharaman on August 19.

If a new DTC would be implemented, it will come as a major relief for those who fall under Rs 5–8 lakh slab. They have been paying 20% tax since 2010–11. Later FY13, the upper threshold for this rate moved to Rs10lakh.

In Budget 2017, the lower middle class cheered with the advantage of lower tax rates announced by Arun Jaitley as the Personal Income Tax proposed halved in the Rs2.5 -5lakh annual income braked to 5%.

In the interim Budget 2019 proposed by Finance Minister Nirmala Sitharam, full tax rebate offered to individuals with taxable annual income up to Rs5lakh. Those with a total annual income of over Rs 10 lakh currently fall in the 30 percent tax slab. Rumour has it that individuals who earn up to Rs 55 lakh may also get major tax relief.

Sitharaman recently had announced a relaxation in the corporate tax rates for domestic companies and new manufacturing domestic companies. As per the tax reforms, domestic companies will be taxed at 25.17 percent, whereas new manufacturing firms will be taxed at 17 percent.

Both tax rates include all the surcharges and cess and will be applicable from the ongoing financial year. The decision is meant to increase liquidity at the companies’ disposal and encourage foreign investment, especially in the manufacturing segment.

One of the big hurdles to investment has been higher tax rates in India, apart from issues like labor laws and unfriendly policies in various sectors like telecom and mining. The ease with the newly proposed lower tax rate will stimulate the investment slashing corporate tax rates, by an average of 10% point.

It is assumed that the FM will lose Rs 145,000 crore on a business-as-usual basis, that is a reasonable assumption since investments will take 2–3 years to fructify. While that will raise the deficit, already under stress since the tax targets were too ambitious, to begin with. The Sensex rose 1500 points within a short while of the announcement of corporate tax slashing.

The lower tax rates will be available to those firms that do not avail of exemptions; if a firm is already availing, say, higher depreciation benefits, it will continue to pay the current tax rate but can move to this whenever it wants. In which case, 22% becomes the highest possible tax rate for companies. And since the complicated exemption regime played a big role in helping tax theft, a flat exemption-less tax regime is the way to go.

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