Is India Heading Towards a Lower Tax Regime?

There is nothing moral or immoral about taxation. It is the context that makes it favorable or oppressive. No two countries can ever have the same tax policy. It all depends on their comparative strengths and weaknesses and the social, economic, and ideological aims that a government wants to pursue.

With the New Year ringing the bells, each and every individual eagerly waits for the announcement of the Budget and expects it to be people-friendly and pocket-friendly. The same has been desired all the more this year with the occurrence of COVID-19 and the economy facing trouble in paradise. People have been expecting this year’s budget to have a simple structure and reduced income tax rates as the Budget 2020 crashed many hopes.

What Is a Tax Rate?

A tax rate is a percentage at which an individual or corporation is taxed. India uses a progressive tax rate system, in which the percentage of tax charged increases as the amount of the person's or entity's taxable income increases. A progressive tax rate results in a higher amount collected from taxpayers with greater incomes.

Economic activity reflects a balance between what people, businesses, and governments want to buy and what they want to sell. In the short run—focusing on the next one or two years—economic policy has greater impact on the demand side. When the economy is weak, for example, the Federal Reserve tries to boost consumer and business demand by cutting interest rates or purchasing financial securities. Congress, for its part, can boost demand by increasing spending and cutting taxes.

Tax cuts increase household demand by increasing workers’ take-home pay. Tax cuts can boost business demand by increasing firms’ after-tax cash flow, which can be used to pay dividends and expand activity, and by making hiring and investing more attractive.

Tax policies can also affect the supply of labour in the short run. A cut in payroll taxes could bring some workers into the labour market or encourage those already working to put in more hours. Such supply changes have little effect on output if the economy is operating well below potential. Under those conditions, people have difficulty finding more work even if they want it. If the economy is operating near potential, however, increased labour supply can translate to increased output.

The Union Budget 2020

The Finance Ministry announced the introduction of a new tax regime in the 2020 Union Budget. While this budget was brought about with the aim to ensure seamless working of the income tax system, it has also come up with more tax slabs combined with different rates of taxes as compared to the previous slab structure. With the new budget policies, an individual who earns between Rs.5 lakh to Rs.10 lakh now will pay 20% tax on his/her income.

The proposed mandate probably works for the government with systematic changes. However, people from salaried section have varied opinions around it. The primary reason being they will be under a financial crunch due to these new policies. While the Ministry came up with the concessional tax regime, it meanwhile removed some benefits specifically with reference to certain deductions. These comprise of standard deductions of Rs.50, 000 under section 80C of Rs.1.5 lakh and also the interest incurred on any self-occupied property of Rs.2 lakh. This makes the concessional tax regime slightly non-beneficial for the taxpayers.

The advantage with this new tax structure is that it will eventually aid in making the tax filing procedure quite simpler as compared to the previous structures. However, the present tax regime will be beneficial for only those who have minimum investments. On the other hand, an individual with a considerable amount of investment is expected to suffer. Additionally, a person who has just initiated earning will not plan to invest in tax-free schemes as this will eventually lead to the reduction in the household savings.

Impact of the new tax regime on the savings

With the pandemic striking and disrupting our lives, our income suffered a setback too. It made us realize the importance and value of money especially savings as many people had to experience the troubles associated with layoffs. There has been a transition in the consumer psyche as individuals now have shifted their focus on saving for emergencies rather than indulging in lavish expenditures.

With the new tax regime increasing the tax slabs on the savings and income incurred, we wouldn’t recommend moving on to the new tax regime as savings are now an essential element of any individual’s financial planning strategy. In this scenario, the new tax regime does not seem like a win-win deal for both the government and the citizens especially the savers. It is expected that there will be a massive impact on the savings as the reduced tax slabs have come with the removal of deductions for tax exemptions.

The silver lining is that the individuals have an option to choose from between the existing tax regime or the previous one. There is no mandatory policy executed and the individuals can choose the structure that fits their bill. However, the choice should be post thinking through as the option is between availing the benefits of tax exemptions and deductions (existing tax regime) versus low-income tax slabs with no exemptions and deductions (new regime). There are no applied conditions and exceptions and the choice is purely on the individual. The decision should be made taking into consideration both the pros and cons of both the tax regimes and the impact that they will have on the individual financial strategy and planning. All we can hope is this year’s Budget to be beneficial for the common man as well so that there is no financial stress and meanwhile the losses due to the pandemic can also be covered.

Belying huge expectations, Budget 2021 has not provided any income tax relief to tax payers. No changes in income tax slabs or rates have been proposed. Nor have any additional tax exemptions or deductions been introduced. Standard deduction for the salaried and pensioners also remains same as before.

With no change in the basic exemption limit, income tax slabs and rates, an individual tax payer will continue to pay the tax at the same rates applicable in FY 2020-21.

Effective from April 1, 2020, a salaried individual was supposed to choose between the new and old tax regime. Budget 2020 introduced a new income tax regime with reduced tax rates for those willing to forego 70 tax-exemptions and deductions under it. 

This new tax system has been made optional and continues to co-exist with the old/existing one which comprises three tax rates and various tax exemptions and deductions available to a taxpayer. Commonly availed tax-exemptions and deductions include tax exemption on house rent allowance, standard deduction, leave travel allowance, section 80C, section 80D deductions etc. 

 Individuals with a net taxable income of up to Rs 5 lakh in a financial year will be able to avail tax rebate of Rs 12,500 under section 87A in both the existing/old and new concessional tax regimes. Effectively, individual taxpayers with net taxable income of up to Rs 5 lakh will continue to pay zero tax in both the tax regimes.

The Radical tax reforms include not putting additional burden of Income on tax payers, increased dependence on disinvestments for meeting the deficit, bringing efficiency in tax collections using use of data analytics and reduction in human interface between taxpayer and officer, to name few.

The budget is in line with the vision of Prime Minister of ATMANIRBHAR BHARAT and at the same time making India a preferred choice for the world to do business.

Also, the Budget reflects the intent of forwarding the commitment made to taxpayers of transparency, minimum government maximum governance and does not include so called small print devils and many retrospective amendments.

From the above I wouldn’t assume that the country is moving towards a low tax regime, last year we were dealing with signs of recession and this year we have the pandemic which prompted the government to not change the taxation at all. In my opinion we are still far from a low tax regime given the need for development expenditure that needs to be done by the government.

With us using our Bank Nifty Option tip for the day and intraday stock tip, the kind of profit you will accumulate will make you forget looking for tax incentives as you will start saying that if I am earning, we donot mind paying the tax.