Questions arising out of new income tax rates

Honourable finance minister while presenting the budget has provided an option to Individuals and HUFs to pay tax according to new rates. The optional rates as per Section 115BAC and their comparison with existing rates are as following.

Prima facie, the rates appear a moderation, but there is a catch.

The optional rates are conditional. The condition for concessional rate shall be that the total income of the individual or HUF is computed,

• without any exemption or deduction under the provisions of clause (5) or clause (13A) or prescribed under clause (14) (other than those as may be prescribed for this purpose) or clause (17) or clause (32) of section 10 or section 10AA or section 16 or clause (b) of section 24 [in respect of property referred to in sub-section (2) of section 23] or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) of section 35 or section 35AD or section 35CCC or clause (iia) of section 57 or under any provisions of Chapter VI-A other than the provisions of sub-section (2) of section 80CCD or section 80JJAA;
• without set off of any loss,-
• carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in (a) above; or
• under the head house property with any other head of income;
• by claiming the depreciation, if any, under section 32, except clause (iia) of sub-section (1) thereof, determined in such manner as may be prescribed; and
• without any exemption or deduction for allowances or perquisite, by whatever name called, provided under any other law for the time being in force.

The conditions are such that they raise more questions than answers. Listed are a few for us to wonder.

♠ Which option is better? Will any body opt for new rate?

This is all it comes down to.  The honourable finance minister in the budget speech said

“In the new tax regime, substantial tax benefit will accrue to a taxpayer depending upon exemptions and deductions claimed by him.  For example, a person earning Rs.15 lakh in a year and not availing any deductions etc. will pay only Rs. 1,95,000 as compared to Rs. 2,73,000 in the old regime. Thus, his tax burden shall be reduced by 78,000 in the new regime.  He would still be the gainer in the new regime even if he was taking deduction of Rs. 1.5 Lakh under various sections of Chapter- VI-A of the Income Tax Act under the old regime.”

Is it so? First of all, inherent assumption here is that the person doesn’t have any exemption/deductions. Suppose, he has following deduction/exemption claims.

Below is a comparison showing income and tax liabilities at various income levels under existing and new systems under the assumption of eligible deductions stated above.

The above comparison indicates, that in all the case, the old system is beneficial. The question will anybody opt for new tax rates?

It is important to remember that though tax saving was one of the objectives for investments. Even in absence of tax incentive, a person will voluntarily also make investments like school fees, life insurance, housing loan repayments, education loans, mutual funds, PPF, pension schemes, mediclaim premiums. These outflows are essential to the basic quality of life and not because of tax incentives.

♠ When to choose the system?

The option shall be exercised for every previous year where the individual or the HUF has no business income, and in other cases the option once exercised for a previous year shall be valid for that previous year and all subsequent years. The option shall become invalid for a previous year or previous years, as the case may be, if the Individual or HUF fails to satisfy the conditions and other provisions of the Act shall apply. The option has to be chosen and exercised at the time of filing return of income.

For taxpayers having business income, the option has to be chosen once and can’t be changed in subsequent years. Suppose, a taxpayer choses existing rates this year. In the next year, there is a change some provision leading to a lower liability of tax according to new rates. He has no option to change over.  Why he should he a taxpayer bind himself for all years to come, when the government doesn’t bind itself with rates? (Forget future, government can even go in past and make retrospective changes).

For salaried individuals, TDS has to be deducted. Though the requirement is to choose tax rates at the time of filing the return of income and taxpayer has the option to choose, at which rates will the employer deduct TDS? Old or new?

Will the deductee taxpayer be given option by employer?

♠ What is the direction of change?

In recent years, there have been many changes in the tax structure. The government has taken radical steps like demonetization and also implemented long pending GST. DTC has been shelved. The choice given for tax rates in the current year is indicative of the direction where we are heading. DTC is regime of lower tax rates and a tax structure with minimum deductions and exemptions. Following questions arise.

Are we moving towards DTC?

Is it so that the DTC may not be introduced but the current income tax laws may be amended to incorporate the spirit of DTC?

Is this option given to the taxpayer a temporary one or in coming years, the taxpayer will not have any option but to follow a single system-THE NEW ONE?

♠ Will new rates boost consumption?

The argument which the government puts is interesting. The government doesn’t accept the economic slowdown anywhere in the budget speech, but says that since the new system does not have any obligatory investments, people will move from investment to consumption leading to economic recovery.

First of all, there is miniscule minority paying income tax in India.  How is there moving from investment to consumption going to revive economy?

The bigger question is – will they move to consumption? As explained earlier, the outflows eligible for deductions are not necessarily because of tax deduction and will continue because of various reasons stated above. In such a scenario, isn’t this thinking a bit flawed?

[Views expressed in this article are strictly personal in nature and readers are advised to apply their independent mind, knowledge and take assistance of professionals in appropriate cases before acting.]