NEW DELHI: The Narendra Modi government’s fourth budget is likely to make a sweeping recast of direct taxes focusing on both corporate tax and personal income tax to give a boost to the economy that’s struggling in the wake of demonetisation. Finance minister Arun Jaitley will announce the budget on February 1, a month earlier than usual.
The recast is likely to speed up progress to a corporate tax rate of 25%, already a stated objective of the government, and offer substantial reliefs for small taxpayers who have backed demonetisation. The dividend taxation framework is likely to see more changes to make it more onerous for those receiving the bulk of their income in this form to make the regime more equitable. “The focus this year is on direct taxes,” said a senior government official involved in the deliberations. “With the goods and services tax (GST) to come from next financial year, there isn’t much to be done on the indirect taxes side. The customs duty structure could see some changes.”
Acall on the changes will be taken at the highest political level shortly. To encourage compliance and transparency, the government may adopt a carrot-and-stick approach, tax experts said. “This would mean more moderate tax rates (corporate as well as personal) and tightening of income disclosure norms. Thus, the minimum exemption income limit could be hiked and slab rates in the middle reduced further,” said Sudhir Kapadia, national tax leader, EY.
The government had in its last budget introduced an additional 10% tax on dividends in excess of Rs 10 lakh per year in addition to the dividend distribution tax.
Though this brought about some equity, those in the highest earning bracket still pay less tax. Under the proposed regime, dividends above a threshold can be clubbed with income of the assessee and taxed at the marginal rate, now 30% in the top bracket. Rahul Garg, direct taxes head at PwC India, favours continuation of the current regime to see how it has worked before making more changes.
In his budget for FY16, Jaitley announced the government’s intention to lower corporate tax to 25% over four years, while phasing out exemptions. A beginning was made last year with companies up to Rs 5 crore turnover levied tax at 29%. New manufacturing companies set up after March 1, 2016, were offered an option of 25% tax plus surcharge. A bigger cut is likely for small and medium companies that have faced the brunt of demonetisation.
PERSONAL INCOME TAX
People who pay income tax are likely to be the big gainers, having faced hardship due to demonetisation while also likely getting lower salary increases and even facing the threat of job loss. While personal tax rates may remain the same, there could be a sharp increase in the exemption limit of Rs 2.5 lakh and wider tax slabs with more people falling in the lower ones.
The highest tax rate of 30% at present kicks in at Rs 10 lakh annual income. Kapadia also expects reporting of high-value cash withdrawals by banks to tax authorities along with the existing requirements for cash deposits and stricter enforcement of penalty in respect of improper disclosures in line with demonetisation exercise.