Published Editorial

Vote on Account 2014: 10 things that defined personal taxation in the last decade

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by

Preeti Sharma
Senior Tax Professional, EY


Contributed by:

Sachin Hans
Senior Tax Professional, EY

Tax system has undergone various changes over the last few decades globally in order to meet the development needs and economic challenges of the country. The wave of reforms which started in 90s in India was to meet the impending fiscal crisis. However, looking at the tax reforms implemented in last 10 years, it is clear that the intention has been to increase the tax base to generate more revenue by reducing tax rates. Here is a look at 10 things that made a significant impact on personal taxation in India in the last 10 years: 

Rationalization of tax rates 

If one were to look at historical personal income tax rates in India, the trend would appear to be quite shocking. Tax payers in the seventies paid up to 93 per cent of their income in taxes. Since then, the income tax rates have steadily declined in India, with the maximum marginal rate coming down to 30.9 per cent in 2013-14. Also, the slabs at which various tax rates are applicable have been widened over the years and with continuous rationalization of tax rates, India is only moving closer to global standards. 

Technology introduced for smooth tax compliance 

Central Board of Direct Taxes (CBDT) has worked towards usage of technology for simplifying compliance and administration. However, there are still lots of difficulties faced by the tax payers due to technical constraints in the tax department's web portal. Therefore more needs to be done to accomplish optimum tax compliance by using technology. Further, Revenue Authorities have started to use technology to track compliance defaults but it's still a long way to achieve an era of minimum enforcement due to online procedures. 

Introduction of the Direct Tax Code (DTC) 

DTC, released in August 2009, proposed far-reaching changes in the tax system. The code firmly wedded to the idea that a lighter rate structure will increase tax revenues by improving tax compliance and therefore proposes to slash both corporate and personal income tax rates. However, subsequent changes in the original draft has water downed the intention. Ambiguity still lures around the feasibility of the code and whether it will be able to deliver a breakthrough in direct tax collections. 

Measures taken to tackle black money 

In an effort to build a more transparent tax system and to unearth unaccounted assets/wealth held by Indian residents abroad, in 2011, the Tax Authorities modified the manner and detail in which foreign source incomes/assets were to be reported in the income tax return forms. Further, in last 10 years the Government has also signed Exchange of Information Agreements with other countries. Though these are welcoming steps, but mere reporting requirements would not serve the purpose unless the Government takes more drastic steps by collating authentic information under Exchange of Information Agreements and actually act on such information. 

Taxation of 'Gifts' as income from other sources 

Considered as a crucial amendment to the income tax law in 2009, the Government introduced tax on transfer of any property for inadequate or without consideration with certain exceptions. This provision is applicable to immovable property, shares and securities, jewelry, archaeological collections, drawings and other works of art in case the aggregate value of such property exceeds Rs 50,000. This amendment is again a step towards tackling the transactions in kind having 'money's worth' which escaped taxation. 

Introduction of TDS on transfer of property by an Indian resident 

With the infrastructure boom and sudden increase in property transactions in the last few years, tracking of information on such transactions and ensuring tax compliance is a challenge for the Government. With the intention to have a reporting mechanism for transactions in the real estate sector, Finance Act, 2013 extended the obligation to deduct tax at source (by the resident transferee) on transfer of immovable property. 

Taxing the 'super-rich' 

In order to boost revenue collection to feed the crumbling economic growth, Finance Act, 2013 introduced surcharge @ 10% for those individuals whose total income exceeded Rs 1 crore. Levy of surcharge on 'super-rich' tax payers is a step towards 'equity' of taxation. However, at what income level a person becomes super rich for tax purposes is still a question for debate. 

Benefits introduced for Senior Citizens 

Few tax reforms introduced in the last couple of years have indicated the Government's intention to provide some relief to senior citizens. The Finance Act, 2011 reduced the qualifying age for senior citizens from 65 to 60 years for the purpose of various tax benefits. Further, the Finance Act, 2012 also exempted senior citizens earning passive income (interest, rent etc.) from payment of advance tax. However, the Government still has to a cover a long distance to provide social security benefits to senior citizens. 

Increasing limit for payment of wealth tax 

The Finance Act, 2009 also made a significant amendment by raising the threshold limit for payment of wealth tax from Rs 15 lakh to 30 lakh. Keeping in mind the inflationary index, the increase in the limit provides some relief but is still away from market realities. Fringe Benefit Tax (FBT). 

FBT was introduced by Finance Act, 2005 with the intention to lighten the tax burden on the employees and shift the same to the employer. However, considering the compliance burden imposed on the corporates and only a 3% of the total direct tax collections contributed to the Government by FBT, the same was abolished by Finance Act, 2009. 

Hence, we see that we have come a long way in personal tax reforms over the past few decades, be it in terms of reducing the tax burden on the individuals or making the tax system more transparent and efficient. The Finance Minister, at this time of the year, again tries to juggle many hats of inflation, economic growth, currency and fiscal rationalization and we hope to get a win-win situation again for the Government and the taxpayers. 

Views expressed are personal