The government has held extensive discussions over the past few weeks to overhaul the new personal income tax regime without exemptions, with a new plan expected to be announced in the Union budget on 1 February, a person aware of the development said.
One of the proposals examined is to add more slabs to the new income tax scheme so that the income range covered in each slab is narrower, preventing taxpayers with diverse incomes from clustering in wide slabs, said a second person, who also spoke on condition of anonymity.
Extensive discussions have been held, and you have to wait for the budget for the revised scheme,” the first person said.
The discussions in the finance ministry were around two key aspects. One is about making the new personal income tax regime more acceptable while keeping it simple, and second, whether the shift to the new income tax regime by a large number of individuals should be a revenue-neutral affair for the exchequer and to what extent, if at all, the government can forgo revenue so that the Centre’s overall fiscal maths does not get upset.
“First, you have to see whether moving to the new system should be revenue-neutral or you can give up, say, ₹20,000-25,000 crore or so in revenue. Also, the slabs should not be such that it gives a perverse incentive for people to remain in a lower slab,” the second person cited above said.
Currently, there are six slabs in the new personal income tax regime, starting with the ₹2.5-5 lakh income bracket taxed at 5%, which progresses to 10%, 15%, 20% and to 25% with each increase in income of ₹2.5 lakh and then to the 30% rate for those earning ₹15 lakh and above.
Compared to this, the old tax filing regime has only three—5% tax for income in the range of ₹2.5-5 lakh, 20% for income of ₹5-10 lakh and 30% for income above that.
One key challenge for the government to sacrifice revenue in sweetening the new income tax scheme is that despite the perception about the middle class bearing high-income taxes, policymakers are grappling with the fact that of the more than 70 million assessees, only a small portion actually pay tax and the rest file returns showing no tax liability.
Prime Minister Narendra Modi had in August 2020 highlighted at a tax event that in a country of 130 billion people, only 15 million pay income tax, excluding those filing returns with no taxable income.
Queries emailed to the spokesperson for the finance ministry on Tuesday remained unanswered at the time of publishing. The spokesperson for the Central Board of Direct Taxes declined to comment on queries sent by Mint saying that the Union budget is a highly confidential document.
Experts said revenue would be a key concern for the government while reworking the new tax scheme, but it needs to offer benefits for an individual to get on board.
According to Archit Gupta, founder and chief executive officer of Clear, a tax and fintech software as a service (SAAS) company, revenue considerations cannot be kept out of the equation, and the question is how to beneficially refine the scheme without the exchequer feeling the pinch.
“It is a fine balance to be achieved. One benefit offered under the new tax regime is that there is no need for bills and receipts to be submitted, yet it has not found much favour. The government has had the chance to review the scheme’s adoption. A higher basic exemption limit and relief on severance pay received by individuals who have been laid off could be considered,” said Gupta. Given the overall fiscal situation, it appears it will be very challenging for the government to do something extraordinary in sweetening the scheme, Gupta said.
In a presentation shared with Mint on improving the adoption of the new tax regime, EY said that the basic exemption limit could be raised from ₹2.5 lakh to ₹5 lakh and certain deductions like investment in provident fund and interest payment on home loans that are currently allowed under the old scheme could be offered under the new scheme.