CA. Tejas K. Andharia

Finance Bill 2017 : Tax Plannning of Surcharge and Controversy related to Surcharge:

In this article, taking three provisions of Finance bill 2017, taxation effect is studied under different scenarios with hint of tax planning. Further, controversial provision of surcharge under one of the scenarios with its suggested solution is also given.

1. Income Tax slabs are not changed, but the tax rate for first taxable slab of income from Rs. 2,50,001/Rs. 3,00,001 to Rs. 5,00,000 is decreased from 10% to 5%. So, now there will be directly a slab of 20% after the slab of 5% tax. As in the case of  very senior citizens (every individual, being a resident in India, who is of the age of eighty years or more at anytime during the previous year), tax rate is NIL till income of Rs. 5,00,000, so above mentioned change will not affect to them. [Applicable from A. Y. 2018-19]

2. Surcharge in case of individual, H.U.F., A.O.P., B.O.I. and artificial juridical persons will be in two phases as under.

Sr.
No.
Taxable Income Surcharge on Tax
1 More than Rs. 50 Lakhs but not exceeding Rs. 1 Crore 10%
2 More than Rs. 1 Crore 15%

[Applicable from A. Y. 2018-19]

3. Rebate under section 87A is decreased from (up to) Rs. 5,000/- to (up to) Rs. 2500/-. Further, this rebate will be available to individual resident in India whose taxable income does not exceed Rs. 3,50,000.] [Applicable from A. Y. 2018-19].

4. Aggregating the effects of point no. 1, 2 and 3 given above, tax is calculated under different scenarios in tables given below.

Table-1

Scenario-1
Taxable Income of Rs. 3,50,000/-
Scenario-2
Taxable Income of Rs. 5,00,000/-
Particulars AY 2017-18
(existing)
AY 2018-19
(After Budget)
AY 2017-18
(existing)
AY 2018-19
(After Budget)
Tax as per slab(s) 10,000 5,000 25,000 12,500
Less: Rebate 5,000 2,500 5,000 0
Tax after Rebate 5,000 2,500 20,000 12,500
Add: Surcharge 0 0 0 0
Add: Cess 150 75 600 375
Total Tax 5,150 2,575 20,600 12,875
Savings in Tax 2,575 7,725

Table-2 (Tax planning)

Scenario-3
Taxable Income of Rs. 51,00,000/-
Scenario-4 (Tax Planning)
Gross Income of Rs. 51,00,000/-
Particulars AY 2017-18
(existing)
AY 2018-19
(After Budget)
AY 2018-19
(After Budget)
AY 2018-19
(After Budget)
Suppose Rs. 1 lakh donated in Prime Minister’s National Relief Fund
Tax as per slab(s) 13,55,000 13,42,500 13,42,500 13,12,500
Less: Rebate 0 0 0 0
Tax after Rebate 13,55,000 13,42,500 13,42,500 13,12,500
Add: Surcharge 0 1,00,000 1,00,000 0
Add: Cess 40,650 43,275 43,275 39,375
Total Tax 13,95,650 14,85,775 14,85,775 13,51,875
Savings/(Excess) in Tax -90,125 1,33,900
So, net savings after donation Rs. 33,900

Comment: In Table-2 (Scenario-3), you can observe that surcharge of Rs. 1 lakh (even after marginal relief) is payable after budget when someone earns Rs. 1 lakh in excess of 50 lakhs. Here one can make tax planning by contributing that amount of Rs. 1 lakh to say Prime Minister’s National Relief Fund by which taxable income will get down to Rs. 50 lakhs and surcharge of Rs. 1 lakh (plus 3% Cess thereon) can be saved and further saving of tax @ 30% (plus 3% Cess thereon) on the amount of that 1 lakh.

Table-3

Scenario-5
Taxable Income of Rs. 1,02,00,000/-
Particulars AY 2017-18
(existing)
AY 2018-19
(After Budget)
Tax as per slab(s) 28,85,000 28,72,500
Less: Rebate 0 0
Tax after Rebate 28,85,000 28,72,500
Add: Surcharge 2,00,000 2,00,000
Add: Cess 92,550 92,175
Total Tax 31,77,550 31,64,675
Savings/(Excess) in Tax 12,875

Table-4 (Surcharge related controversy)

Scenario-6
Particulars AY 2018-19
(After Budget)
Taxable Income of Rs. 1,02,00,000/-[1]
AY 2018-19
(After Budget)
Taxable Income of Rs. 1,00,00,000/-[2]
Gain/(Loss) of Tax

 

 

 

 

[3]=[1]-[2]

Tax as per slab(s) 28,72,500 28,12,500 60,000
Less: Rebate 0 0 0
Tax after Rebate 28,72,500 28,12,500 60,000
Add: Surcharge 2,00,000 2,81,250 -81,250
Add: Cess 92,175 92,813 -638
Total Tax 31,64,675 31,86,563 -21,888

Comment: In Table-4 (Scenario-6), you can observe that person whose income is Rs. 1 crore will have to pay more tax of Rs. 21,888/- as compared to the tax on income of Rs. 1.02 crore.  This is against the canon of equity which says “The subjects of every state ought to contribute towards the support of the Government, as nearly as possible, in proportion to their respective abilities, that is, in proportion to their revenue which they respectively enjoy under the protection of the State”.

So, it is suggested to finance ministry to add the para given below as point (c) at the end of Paragraph A to Part III to The First Schedule to The Finance Bill, 2017.

“(c) Notwithstanding anything contained in preceding para (b), minimum surcharge payable, in case of taxable income exceeding Rs. 1 crore, will be determined as per following formula.

Surcharge = amount of taxable income * 2,81,250 / 1 Crore”.

By inserting the above provision, it can be assured that proportion of surcharge payable on income of Rs. 1 crore will be applied to those whose income is in excess of Rs. 1 crore (even when he/she gets marginal relief regarding surcharge). This will ensure canon of equity.

(CA. Tejas K. Andharia -B. COM, F.C.A., D.I.S.A.(ICAI),  D.I.R.M.(ICAI), Bhavnagar, Gujarat, tejasinvites@gmail.com)

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