Union Budget 2023-24: Pre-Budget wishlist on personal tax front

1. Removal of the highest slab of 42.7% and restricting the same to 35.88% as very few persons are covered by the same

Currently, there are as much as 10 tax slabs rates for individuals in the concessional tax regime ranging from 5.2% to 42.744% considering the effective tax rates including surcharge and health and education cess. A nominal percentage of the total individual taxpayers pay tax as per the highest slab rate. Further, the highest tax rate for individuals in several developing economies such as Thailand, Indonesia, Malaysia, Philippines, Vietnam, etc. is quite less than that prevailing India.

Thus, it is expected that the highest tax bracket be restricted to 35.88% (i.e. 30% (basic tax) plus 15% (surcharge) plus 4% (cess)) so that the personal tax rates regime is also incentivized by the reduced tax rates and brought in consonance with the rationalized tax rates for corporates. Also, too many slab rates are unnecessarily complicating the taxation structure for individuals.

2. Rationalizing long term capital gain at 15% for all assets other than listed shares and uniform holding period of 24 months for other assets

As per the prevailing provisions of the IT Act, capital gains are taxed depending on their classification as long term or short term that further depends on the holding period of the capital asset which ranges from 12 months to 36 months which depends on the nature of capital asset. For instance, listed shares and listed units of equity oriented mutual funds have a threshold period of 12 months, unlisted shares and immovable property have a threshold period of 24 months whereas debt oriented mutual funds have a threshold period of 36 months.

Also, there are multiple capital gains tax rates on long term capital gains (LTCG) depending on the type of capital asset. For instance,

a) 10% above long term capital gains of Rs. 1,00,000 (u/s 112A) for listed shares, zero coupon bonds, etc.,

b) 20% (u/s 112) for land and building,

c) In case of offmarket transfer, option to avail 10% tax rate for listed shares without claiming indexation benefit or 20% with indexation

d) Short term capital gains (STCG) are taxed either @ 15% (u/s 111A) or as per the marginal slab rates applicable to the investor.

Thus, the existing capital gains tax structure for capital assets with multiple tax rates and the threshold period of holding results in unnecessary complexity for taxpayers.

Accordingly, apart from the capital assets specified u/s 112A and 111A (i.e. Listed Equity Shares, Unit of Equity oriented funds and Unit of Business Trusts), it is recommended to standardize the threshold holding period for all other categories of capital assets to 24 months. Further, the rate of tax on LTCG should be capped to 15%.

3. Applicability of grandfathering provisions in case of tax neutral transfer (say, distribution of listed shares by Private Family Trust to beneficiary)

As per the prevailing provisions of section 55(2)(ac) of the IT Act, grandfathering benefit i.e. exemption on capital gains accrued upto 31st January 2018 is applicable on listed equity shares which were acquired / received by way of transfer prior to 1st February 2018. However, the said section does not specifically provide for extension of such grandfathering benefit to the recipients of such shares who have acquired such shares via tax neutral transfers (for instance, inheritance) post 1 February 2018 but the original purchaser had purchased the same before 31 January 2018. Accordingly, there are several tax neutral transfers which are not covered within the ambit of grandfathering.

Thus, the said grandfathering benefit must also be extended to tax neutral transfers as aforementioned to avoid genuine hardships to the taxpayers.

4. Extending the timeframe of acquiring loan for purchase of electric vehicles u/s 80EEB to 31 March 2024

As per the provisions of section 80EEB of the IT Act, individuals are eligible to claim deduction of upto Rs. 1,50,000 for interest payable on loan taken by them from any financial institution for the purpose of purchase of an electric vehicle. However, the said loan must be sanctioned on or before 31st March 2023. Further, Corporates are switching to procure and promote electric vehicles as part of ESG initiatives and thus have a long-term commitment towards environmental sustainability. Thus, considering the overall push towards environmental sustainability and also in order to encourage individuals to opt for electric vehicles over non-renewable fuel driven vehicles, it is recommended to extend the said timeframe of acquiring loan to 31st March 2027.

5. Non-grant of full TDS credit appearing in Form 26AS

As per the existing Income-tax return processing mechanism, the taxpayers are not granted full TDS credit appearing in Form 26AS in cases where the income offered in the tax return (as per books) is lower than that as reflected in Form 26AS. It is important to note that the receipts as appearing in Form 26AS may be pertaining to income already offered to tax in preceding financial years and are appearing in current year’s Form 26AS. This may be due to difference in method of accounting followed by the deductor and the taxpayer.

Further, it results in non-grant of TDS credit to the taxpayer either in preceding financial year in which income has been offered in the tax return (as TDS credit does not appear in Form 26AS) or in the subsequent years in which it may appear in Form 26AS (as the income as per books is lower than gross receipts appearing in Form 26AS), resulting into loss of TDS credit to the taxpayer.

For instance, say Gross receipts as per Form 26AS for FY 2021-22 is Rs. 100 & TDS credit — Rs. 10 and income offered in the tax return is Rs. 80 and TDS credit claimed is Rs. 10. Kindy note that the difference in income – Rs. 20 has already been offered to tax in FY 2020-21 on accrual basis by the taxpayer (TDS credit claimed NIL as not appearing in Form 26AS of FY 2020-21). The taxpayer has claimed the TDS credit for Rs. 2 (corresponding to Rs. 20 income in FY 2021-22). As per the current return processing mechanism, the taxpayer is neither getting TDS credit of Rs. 2 in FY 2020-21 (as TDS credit is not appearing in Form 26AS) nor is getting TDS credit in FY 2021-22 (as income offered Rs. 80 is less than gross receipts – Rs. 100 appearing in Form 26AS).

Therefore, in such cases, it is recommended to modify the return processing mechanism procedure and ensure TDS Credit be allowed in the year in which it is appearing in Form 26AS even if gross receipts as per Form 26AS are higher than income as offered in the return of income.

6. Removing the restriction of deduction of interest expense from dividend income and allowing other related expenses

The Finance Act 2020 has abolished the dividend distribution tax regime. Presently, the dividend income on shares or income with respect of units of mutual funds is fully taxable in the hands of the shareholders and unit holders. Section 57 of the IT Act provides for deduction on account of interest expenditure upto 20% of the dividend income or income in respect of such units. Further, no other deduction in respect of such income is allowed in the hands of the shareholders and unit holders. It is notable that to earn the dividend income, the taxpayer may also be required to incur certain other incidental costs besides the interest cost.

Therefore it would be expected that other incidental costs incurred to earn such dividend income may also be allowed as deduction against such income. Further, it is also expected to remove the restriction of deduction on account of interest expenditure (presently capped @20% of dividend income) under section 57 of the IT Act.

7. Rationalisation of section 194N pertaining to TDS on cash withdrawal as such withdrawal may not constitute ‘income’ for the deductee

Provisions of Tax Deducted at Source (‘TDS’) were introduced in order to deduct tax at source on certain specified nature of ‘income’. However, as per section 194N of the IT Act, if an individual withdraws cash worth Rs. 1 crore or more, then the person responsible for paying such sum shall deduct TDS @ 2%. However, such cash withdrawal might not necessarily constitute ‘income’ in the hands of the individual.

As this is defeating the sole purpose of the concept of TDS on income, the said provision should be reconsidered and rationalized.

8. Relaxation from applicability of Black money Act provisions in case of filing of updated returns u/s 139(8A)

Finance Act, 2022 has introduced the concept of updated return so as to allow an assessee, a longer duration to file return of income. As per the provisions of section 139(8A) of the IT Act, an updated return can be filed within 24 months from the end of the relevant assessment year, subject to certain conditions.

In order to encourage taxpayers to file updated return and voluntarily disclose the details of assets/incomes which was missed erroneously, the section must explicitly relax the applicability of Black Money Act with respect to details mentioned in the updated return with respect to their foreign assets. Further, since the taxpayers are already subjected to a penalty of 25%/ 50% of the tax and interest amount depending upon the time within which such updated return is furnished, imposing further penalties under the Black Money Law may cause hardships to the taxpayer and deter them from opting for the updated return.

9. Convergence of Old and New Tax Regime

Presently there are 2 tax regimes for individuals, popularly known as old regime and the concessional / new regime. The new tax regime subjects the taxpayer to a concessional rate of tax on their income provided certain specified set of exemptions and deductions are not claimed by such person. Thus, there are certain pros and cons in each of these regimes wherein the old regime is fully loaded with exemptions and deductions whereas the new regime offers concessional tax brackets without claiming such exemption or deductions.

It is quite challenging for individuals to compute tax under both the regime and chose the most optimum regime on their own. Also, the provisions are not flexible enough to switch between the favorable regimes every year. Further, it is pertinent to note that the new tax regime failed to gain popularity amongst the taxpayer due to denial of basic deductions available such as standard deduction for salary, LIC premium u/s 80C and Mediclaim premium u/s 80D of the IT Act.

Thus, it is recommended to scrap the concept of 2 regimes and converge them to form only 1 regime so as to simplify and rationalize the taxation for individuals.

10. Rationalization of provisions of section 50CA and 56(2)(x) in case of genuine business transactions

Rule 11UA of the Income Tax Rules, 1962 (‘IT Rules’) prescribes the methodology to calculate fair market value (FMV) of unquoted equity shares for the purpose of section 50CA (i.e. Determination of Full value of consideration in case of unquoted shares) and section 56(2)(x) (i.e. Gift tax provisions) of the IT Act.

The aforesaid sections are levied in case of transactions that are executed below the FMV. In such cases, the transferor is liable to pay tax as per section 50CA and the transferee will be liable to pay tax u/s 56(2)(x) which ultimately leads to double taxation, though not in the hands of the same person but on the same income. However, this adversely impacts genuine business transactions which are not undertaken with the purpose of evading tax.

Thus, the provisions of section 50CA and 56(2)(x) needs to be rationalized and determined on case to case basis in order to avoid genuine business hardships.

11. Family settlement to be included within the ambit of section 47

As per the provisions of the IT Act, tax on capital gains is attracted on transactions where a capital asset is transferred. Section 47 of the IT Act carves-out/exempts certain transactions from the ambit of transfer and accordingly, would not be subjected to capital gains tax.

Specified individuals often receive capital assets as a part of family settlement. Section 56(2)(x) of the IT Act provides that transfer of assets between specified relatives would not be treated as income of the recipient. Further, various courts have passed their rulings in the favour of assessee, stating that family settlement does not attract capital gains.

However, till date, Section 47 does not explicitly provide for an exemption for assets transferred pursuant to a family settlement amongst relatives. Hence, in order to reduce litigations and bring more clarity, it is recommended that section 47 should explicitly include family settlements so as to exempt them from the purview of ‘transfer’ for capital gains purposes.

12. Tax Dispute Resolution Scheme

The Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 had been a path breaking scheme for resolution of indirect tax disputes. The scheme provided for complete waiver of interest, penalty and prosecution and also partial relief for the tax dues (ranging from 40% to 70%) in case of disputed tax.

Similarly, the Vivad se Vishwas Scheme introduced by the Finance Act, 2020 for the purpose of Direct tax resolution scheme received an overwhelming response by the taxpayers wherein almost 125,144 cases out of the total pending 510,491 cases were opted for resolution under the scheme constituting approximately 24.5% resulting in a settlement of over Rs. 97,000 crores.

Still, there is a huge backlog of litigation under the direct tax regime as well and similar scheme will bolster the tax collection, significantly reduce the pending litigations and also overall improve the investment climate.

Thus, considering the response to the above schemes as well as in order to encourage speedy disposal of pending cases, a common tax amnesty scheme may be introduced in order to cover both pending cases under the Direct and Indirect Taxes.

13. Introducing marginal relief for individuals earning nominal income over Rs. 5,00,000

The IT Act provides for several reliefs in the hands of an individual taxpayer in the form of rebate, marginal relief, etc. However, if an individual derives a nominal income above Rs. 5,00,000, he/she will have to adversely bear the liability of tax which is greater than the income earned above Rs. 5,00,000. For instance, if Mr. X’s total income is Rs. 5,01,000, he will not be entitled to claim the benefit of rebate u/s 87A. Thus, his total tax liability will be Rs. 13,208 (including health and education cess @ 4%). Hence, Mr. X will have to pay tax of Rs. 13,208 merely on his additional income of Rs. 1,000.

Hence, the IT Authorities should contemplate of introducing a relief for individuals to avoid genuine hardships.

Author: Dr. Suresh Surana, Founder — RSM India

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