Will Sitharaman revamp income tax slabs to give more cash in hand?3 min read . Updated: 22 Jan 2020, 11:14 PM IST
With the economy in a tailspin and disposable incomes declining, the finance minister will have some tough calls to take on 1 Feb
NEW DELHI : Surjeet Singh, a camera retailer in Old Delhi, is a worried man. Sales have been low for several months, with fewer customers going for an upgrade of equipment or accessories. The slump, he says, has forced him to defer plans to add more brands. “There is no cash in the hands of people. Very few of my customers are investing in new equipment for want of new projects," he says. Singh is among several shopkeepers who feel the pinch of a sharp economic slowdown, which has impacted the purchasing power of people.
This has been a worry for Prime Minister Narendra Modi and finance minister Nirmala Sitharaman, who will present her second Union budget on 1 February. The budget for FY21 is expected to contain the blueprint of how the Modi administration, which returned to office last May with a brute majority, will deal with India’s continuing economic woes, as a series of steps, including a corporate tax rate cut, did little to change the situation.
Will the middle class get tax relief?
Personal income tax relief could leave more money in the hands of people to consume, but the choice before the government is limited. With the tax base remaining finite and a big stimulus of about ₹1.45 trillion by initial estimate given to corporate houses, the government has limited fiscal space to give a tax break to the middle class, the biggest contributors to the government’s personal income-tax receipts. Many economists, including Nobel laureate Abhijit Banerjee and former chief statistician of India Pronab Sen, have also cautioned that only a very small fraction of people pay personal income taxes and a better way to stimulate consumption is to leave more money in the hands of people through schemes such as the Prime Minister’s Kisan Samman Nidhi, the income support scheme for farmers, or the rural job guarantee scheme. However, decisions on tax rates are often political and economics often takes a back seat as optics get better weightage.
A modern tax code
The Finance Act of 2020, which will effect amendments to the Income Tax Act 1960, will include steps to modernize the more than six-decade-old law. Sitharaman is on record saying she will de-criminalize the Income-tax Act and the Prevention of Money Laundering Act . That would make punishment for various lapses less stringent and do away with jail terms where fines could do. The other measure likely to be announced is a scheme for resolving direct tax litigation. It would be similar to the Sabka Vishwas Scheme, 2019, proposed in the last budget to resolve all disputes relating to service tax and central excise duty, both subsumed into the goods and services tax (GST). A task force that reviewed the I-T Act had last year recommended major changes in tax slabs and relief to the middle class. Some of its recommendations are likely to be taken up in the budget.
The government should use the budget to give long-term strategic direction and trigger key reforms needed for sustainable growth, said Daksha Baxi, head, international tax, Cyril Amarchand Mangaldas, a law firm. “The important thing is to make tax compliance easy, problem free and transparent… Tax provisions should be drafted so that no substantive change is made for at least three years. The only change should be clarificatory for removing difficulties in implementation," said Baxi.
Digital economy tax
India is likely to step up taxation of digital economy firms in line with measures being pursued by several other countries, while a global consensus on taxation of new-age companies is awaited. In 2016, India had introduced a tax on revenue generated by offshore tech companies from India by hosting advertisements. A new approach to taxing digital economy firms, such as Google and Facebook, which have a large customer base in India, is in the works.
Streamlining the customs duty structure and the introduction of a border adjustment tax on imports are widely expected. Rectifying instances of customs duty incidence remaining higher on raw material vis-à-vis finished goods, can help streamline the customs duty structure, said Niraj Bagri, partner, Dhruva Advisors. This will be in line with the government’s objective of bringing in structural reforms and also incentivise manufacturing, said Bagri. Last November, commerce minister Piyush Goyal had said that the government was considering a “border adjustment tax" on low-cost imports from free trade partner countries, which will create a level-playing field between such imports and locally produced goods.