New Delhi: The finance ministry is considering offering higher income tax deductions on investments made by taxpayers in securities used to raise funds for government infrastructure projects, two government officials familiar with the matter said.
The current limit is Rs2 lakh and discussions are on to increase it to at least Rs2.5 lakh, but the extra deduction will be available only on investments made in government infrastructure projects.
“Discussions are on to give relief to taxpayers in the form of higher tax deduction. The higher deduction will be for investing in infrastructure projects in the form of bonds or through equity-linked savings schemes," said one of the officials cited above, requesting anonymity. But these investment routes are likely to have a lock-in period, the official added.
Considering that this will be the Narendra Modi government’s last full budget, as general elections are slated for 2019, a higher tax benefit will be cheered by all. It will impact approximately 7.5 million taxpayers in India.
Currently, taxpayers get relief under 80C, 80CC and 80 CCD of the Income Tax Act. The deduction is offered for investments made in provident fund, public provident fund and life insurance premiums. Payments made toward tuition fees of children and home loans also earn tax relief. An additional deduction of up to Rs50,000 is offered for investment in the National Pension System (NPS).
“There is intent to give tax relief to as many taxpayers as possible, but a higher deduction will mean loss of revenue so the exact quantum of the relief will depend on the government’s fiscal elbow room," said another official.
With rising global crude prices putting pressure on the government’s finances, depressed collections from the goods and services tax in its first year and the need to increase government spending in infrastructure, the government has to be cautious with populist measures if the path of fiscal consolidation is to be maintained.
“A higher tax deduction for investment in government infrastructure projects would mean more money will be channelized into these projects and in capital markets. Every Rs10,000 increase in the deductions will lead to an additional investment of Rs7,500 crore, if we consider 75 lakh people pay income tax in India," said Girish Vanvari, partner and head, KPMG India.
In the 2017 budget, the government had provided relief to taxpayers with annual incomes between Rs2.5 lakh and Rs5 lakh by reducing the rate from 10% to 5%. And in 2014-15 the government had increased the tax deduction from Rs1 lakh to Rs1.5 lakh for investments in NPS.
The government is also working on removing concerns of angel investors putting money in start-ups. The government is likely to liberalize the definition of valuation to prevent harassment of investors in start-ups by tax officers.
“There has been extensive demand for a tax holiday to angel investors in start-ups for the first few years. Let us see what can be done," the second officer cited above said on condition of anonymity.
Angel investors typically invest in seed capital for startups and if the valuation of the company’s shares exceeds the fair market valuation, then it attracts income tax under section 56 (2, VII B).
Currently, venture capitalists are exempt from this provision. Start-ups that meet the government’s definition as notified can avail a three-year tax holiday in the first seven years of their existence.
“In order to avoid disputes and litigation, and to provide a favourable investment environment, it is necessary to carve out an exception from tax issues emanating from the valuations. This should be for investments made in the startups across the board and not restrict it only to the those recognised and registered with the government," said Vikas Vasal, national tax leader, Grant Thornton India.