The most awaited 2020 Budget proposals are out. Let us look at the key changes impacting individuals to see if the expectations of reduced income tax and simplified tax regime have been met.
The government has taken a very bold step by introducing a simplified tax structure for individuals. However, while the tax rates have been reduced, several exemption and deductions have been removed. Further, the simplified tax regime would be optional in the hands of the individuals who can continue with the current regime or choose the new regime.
The catch in the story here is that the individual has to forego the deductions and exemptions to avail the lower slab rates of tax. The benefits that an individual would have to give up is a fairly extensive list and includes house rent allowance, standard deduction, interest on housing loan for a self-occupied house property, deductions under Chapter VIA (like 80C that includes –life insurance premium, contributions to provident fund, etc.).
Individuals opting for the new tax regime would still be entitled to few deductions / exemptions such as employer’s contributions to pension scheme, conveyance allowance, allowance to meet cost of travel on tour or transfer, etc.
The individual would need to make a comparative analysis of taxes due under the current regime and the proposed simplified tax regime, as depending on the quantum of deductions / exemptions, the taxes under the current regime could still be lower. Broadly, individuals with taxable incomes in the range of ₹10 lakh to ₹15 lakh may only benefit under the simplified tax regime.
The other significant proposal is abolishment of dividend distribution tax. Dividend income is now proposed to be taxed in the hands of the individual at the applicable slab rates. Though this might encourage foreign investors, it might be a bane for domestic investors as the dividend may be taxed at a higher rate. This could bring in a change in the investment pattern of individuals, especially in mutual funds, given that the dividend income could be taxable at a higher rate as compared to capital gains being exempt/taxable at lower tax rate.
The other key notable change is the proposal to limit the tax benefit to employees on account of employer contributions to PF, NPS and SAF, to a combined contribution limit of ₹7,50,000 per financial year. This would increase the tax impact for employees with higher taxable salary income.
Proposed change to the definition for determination of residential status could particularly impact mobile individuals. Currently, a citizen of India or person of Indian origin staying outside India would qualify to be a resident only if his/her stay in India is 182 days or more during his visit to India. It has been now proposed to reduce the 182-day threshold to 120 days. Also, an explanation has been proposed, to imply that a citizen of India who is not liable to pay taxes in any other country (due to his/her residential status in the other country or any other criteria) shall be deemed to be a resident of India.
An individual who qualifies to be a resident gets further classified as ordinarily resident or not ordinarily resident based on the stay in India. Currently, an individual would qualify as a resident and not ordinarily resident if he/she satisfies either of the following conditions:
i) The stay in India was 729 days or less in the previous seven tax years
ii) Has been a non-resident in India for the nine out of ten previous tax years
The proposal eliminates the first condition and substitutes seven years in the place of nine years in the second condition. Therefore, if the individual has been a non-resident in India for seven out of ten previous tax years, then he would qualify as a not ordinarily resident and be liable to tax in India only on the India-sourced income.
Proposed inclusions to the currently existing provisions related to Tax Collection at Source (TCS) could impact individuals who are making foreign remittances through the liberalised remittance scheme of ₹7 lakh or more in a financial year and individuals purchasing overseas tour programme packages. Tax at the rate of 5% (10% in case of non-PAN/Aadhaar cases) is proposed to be collected at source.
The most important announcement in the Budget is the commitment to eliminate any form of tax harassment. Also, it is proposed to have an enhancement to faceless assessment and shifting of onus on the Donee as regards detailed reporting related to donations. Additionally, a one-time scheme ‘Vivad Se Vishwas’ is proposed as a measure to reduce litigation in the direct taxes. Under the proposed scheme, the taxpayer is required to pay only the disputed amount and gets complete waiver of interest and penalty, if settled by March 31,2020. Alternatively, the taxpayer can settle with additional amount (to be notified) by June 30, 2020.
Overall, it looks like while the taxpayers could benefit from the simplification in processes, in reality the benefit of reduction in tax rate would benefit only few individuals.
(Aarti Raote is Partner with Deloitte India)
