FINANCE

Major relief for taxpayers between Rs 5 lakh and Rs 10 lakh likely as Panel proposes new slab

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Taxpayers earning between Rs 5 lakh and Rs 10 lakh a year may be in line for major tax relief with the task force on the Direct Tax Code suggesting halving the tax rate for them to 10%, two persons aware of the matter said on condition of anonymity.

To be sure, this is still just a suggestion and it is not clear whether the government, which is very focused on increasing its tax revenue, will accept it.

The task force submitted its report last week and recommended that the government increase the number of tax slabs or tax brackets from four to five, but lower the tax rates for many.

There is no change in the first income-tax slab (up to Rs 2.5 lakh a year), which attracts zero tax. The current second slab (Rs 2.5 lakh to Rs 5 lakh) attracts 5% tax. The task force wants to expand this slab (Rs 2.5 lakh to Rs 10 lakh) and have a 10% tax rate, while retaining the available full tax rebate for those earning up to Rs 5 lakh.

“Effectively, people having income up to Rs 5 lakh will have to pay zero tax. Tax will be charged for income between Rs 5 lakh and Rs 10 lakh at 10% and an individual can save up to about Rs 37,500 a year (at the higher end) under the proposed regime,” one of the persons cited above said.

Currently, people earning between Rs 5 lakh and Rs 10 lakh are taxed at the rate of 20%. The proposed third slab (Rs 10 lakh to Rs 20 lakh ) will attract a tax of 20%; it is expected to give a benefit of about Rs 1 lakh to the taxpayer if his or her income is on the upper side, the first person said. People in this slab currently pay 30% (the current slab is Rs 10 lakh and above).

The panel has proposed a fourth tax slab of Rs 20 lakh to Rs 2 crore that will attract a tax rate of 30% and the fifth slab, Rs 2 crore and above, will attract a rate of 35%. Under the current regime, the rate is 30% for people whose incomes fall in these slabs. If the proposal of the committee is accepted, a person earning Rs 2 crore will save around Rs 8.5 lakh.

This is, of course, assuming that there are no surcharges on tax. Currently, for instance, people whose incomes fall in the higher tax slabs pay surcharge.

The Central Board of Direct Taxes (CBDT) did not respond to queries. A government official said on condition of anonymity that the report presented by the task force is yet to be evaluated and that it isn’t necessary to accept all recommendations.

The government constituted the task force on the Direct Tax Code in November 2017 to review the existing income-tax legislation and to draft a new direct tax law in consonance with economic needs of the country. “The recommendations have something for every taxpayer. But, exact benefits can be calculated after one is clear whether the panel proposed to remove cess and surcharge or not,” chartered accountant Jitendra Chhabra said. Currently, with surcharges and cess, a person earning over Rs 2.5 crore pays tax at an effective rate of 42.7%.

“Even if there is a small reduction, it will put more money in the individual’s pocket. I guess it will push aggregate demand. This will push up production and can act as the much needed boost for the economy. But this is only one aspect as there are other encouraging news too,” said Sanjay Kumar, senior director, Deloitte Haskins & Sells LLP.

“Overall, the personal tax collections will be down by Rs 50,000 crore or thereabout only on the rate reduction. But the personal income tax is very buoyant at present, and so with growth in economy that gap in tax will be easily filled. Also, the rate reduction will have a salutary impact on compliance, and also economic growth—the Laffer curve effect,” he added.

His reference is to Reagan-era economist Art Laffer’s hypothesis that suggests if tax rates are too high, people will no longer be motivated to work harder and earn more because most earnings will be going to the government, and instead opt for lower earnings but a better quality of life. Tax rates that are too high, Laffer argued, would therefore actually reduce overall tax revenue of a government.

Source :

MSN

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