Budget 2014: 10 big changes in Personal Taxation that can transform the industry
Tax Partner, EY
Senior Tax Professional, EY
10 July, 2014 or budget day is the day of reckoning for the new government and perhaps the only event of late that is likely to draw eyes away from the FIFA World Cup. There is a wide sense of expectation that this budget will set out the beginning of a new phase for corporate India and the common man alike with its focus on economic and tax reform and the much touted control of inflation in India. Whilst the 'wishlist' from the budget is significant, to say the least, this article aims to pen down 10 possible changes in personal taxation that have the potential to contribute towards the transformation of the industry .
The most significant change is the Recommendations of the Tax Administration Reform Commission (TARC), set up by the government to bring in more credibility amongst tax payers and streamlining income tax procedures. Key amongst these is the focus on improving tax payer experience with measures like setting up of a dedicated organisation, specialized and intensive training to be provided to the officers and staff of tax administration, an allocation of 10 per cent of the tax administration budget on tax payer services, providing pre-filled tax returns to all individuals who would have the option to accept or modify the details. The report also focusses on making radical changes to the process of issue of refunds and if implemented is sure to get a big Kudos from the industry and the tax payers.
The first report of the TARC comes as a breath of fresh air with its comprehensive focus on the recognition of the tax payer as a "customer". These changes if implemented soon and earnestly can have a major impact on the way the industry and the common man perceive the tax administration in India.
Income Tax exemptions: At the top of every individual's list is the hope and expectation of a realignment in the tax exemption limits and slabs. The exemption limit currently stands at Rs 2 lakh for both men and women who are less than 60 years of age. There are expectations that the threshold limit for exemption will be increased to Rs 3 lakh with a tax rate of 10% for individuals earning upto Rs 10 lakhs. This will go a long way in adding to the individual retirement funds as also help the government in channelizing resources for the country.
Increase in the base and limit of Net wealth
Wealth tax is currently applicable at 1 per cent if net wealth exceeds Rs. 30 lakh. The Direct Tax Code (DTC) 2013 proposed to increase the exemption limit to Rs. 50 crores, tax rate of 0.25% and widening of the definition of 'assets'. This will act as an incentive to increased compliance as also brings the prevailing limits at par with the current economic scenario.
Increase in exemption limits for allowances and perquisites
Keeping in view the inflated costs of transportation and medical in India, it should be the endeavor of the new government to raise the exemption limits from Rs 800 to Rs 2,000/3,000 p.m for transport and Rs 15,000 to Rs 50,000 for medical reimbursements/allowances. This will help bring the current exemption limits on a level playing field with the expenditure levels.
Interest on home loans
An enhancement in the limits of the deduction on Interest for Home Loans on self occupied property from the existing limit of Rs 1.5 lakhs to Rs 3 lakhs will have an impact on the revival of the real estate market.
Measures to encourage investments
The threshold limit for exemption in investments under section 80C has remained stagnant at Rs 1lakh for quite a few years. The increase to Rs2.5/Rs 3 lakhs will promote savings as also benefit the equity market, life insurance sectors etc.
Increasing the allowable limit of exemption for donations
Donations are a critical part of social responsibility for individuals and as a measure to promote this it is recommended that the ceiling of 10% of Gross Total Income be done away with, thereby making donations attractive from a tax exemption perspective.
In addition to the above, the government should also focus on bringing in changes in keeping with the international trends. This is important given the focus on globalization and employee movements in and out of India. Key amongst these is:
Clarity with respect to Tax residency certificates especially in case of countries which do not follow a fiscal year.
Issue of comprehensive foreign tax credit guidelines which cover the timing difference between different jurisdictions and issues regarding availability of foreign tax credits at the time of withholding of taxes
Given the recent controversies and litigation, clarity relating to deputation of individuals to work in India in terms of taxation of reimbursements made under such arrangements.
It would not be an understatement to say that 10 July is firmly circled on everyone's calendar- the outcome much awaited.