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    Budget 2022 unlikely to change individual tax rates, give more tax deductions: EY

    Synopsis

    Taxpayers expect that Budget 2022 will provide reduction in income tax rates and surcharges, increase in deduction available under section 80C, increase in housing loan repayment exemption etc. Simply put, the taxpayers' expectation is more money in hand. However, whether or not the Union Budget 2022 will be able to deliver on the taxpayers' expectation needs to be understood in the light of our national priorities.

    New Delhi: Union Minister for Finance and Corporate Affairs Nirmala Sitharaman g...PTI
    By Sonu Iyer

    Budget 2022 is round the corner and tax payers are looking to the Finance Minister to bring some cheer and relief. Spiraling inflation has made cost of living expensive all around. Taxpayers expect that Budget 2022 will provide reduction in tax rates and surcharges, increase in deduction available under section 80C, increase in housing loan repayment exemption, relief on dividend taxation, rationalisation of capital gains across different classes of assets, removal of securities transaction tax, removal of GST on services availed by the common man etc. Simply put, the taxpayers' expectation is more money in hand.

    Whether or not the government will be able to deliver on the taxpayers' expectation needs to be understood in the light of our national priorities. These include continued provision of food grains and other benefits to the COVID-impacted population, MNREGA payouts, protection for MSMEs, fiscal stimulus to the economy, increase in consumption through the full circle of increased capital expenditure.

    From the standpoint of the economy, economists are projecting a GDP growth of 9.2% for FY 22 even though the shadow of the pandemic continues to loom large and it is yet unknown what will be the additional fiscal impact of COVID-19. The government on its part is committed to increase its capital expenditure (Capex) to deliver on the GDP growth and thus will continue to have to rely on tax receipts to be able to finance its Capex needs. The reliance on tax receipts is more so as further borrowing to finance Capex does not make good economic sense.
    It may be argued that the robust collection in tax receipts should give the government room to pass on some tax sops to the taxpayers. However, this tax buoyancy is much needed for the projected GDP growth. It is also needed so that the government, hopefully, does not have to plan for a fiscal deficit as has been the case year on year in the past decade. Government needs a buffer for the uncertain future as there is no definitive date on the expiry of this coronavirus pandemic.

    From a policy perspective, to widen the tax base, the government is already moving in the direction of lower income tax rates sans deductions and accordingly it offered the option of a lower concessional tax rates minus the exemptions/ deductions regime (Concessional Tax Regime/CTR) effective FY 2020-2021. Under the CTR, individuals and Hindu Undivided Family (HUF) taxpayers can offer their total income at the lower slab rate of tax provided they forgo most deductions, exemptions, brought forward losses and unabsorbed depreciation. The CTR regime is optional for eligible taxpayers and decision to opt can be made each year provided the taxpayer does not have business or professional income in that financial year. In other cases, the option, once exercised by a taxpayer, is irrevocable until business/profession ceases and if opted out in any year, such taxpayer cannot opt in again till the business/profession ceases. Data is still awaited to evaluate the success of CTR as the last date of filing income tax returns (ITR) for individuals and HUF was December 31, 2021. In order to push for greater offtake of the concessional tax regime it is unlikely that the Finance Minister would make any change in tax rates or any additional tax deductions under the existing/old tax regime as that would make CTR a non-starter.

    Fiscal and policy compulsions are likely to prevail, and we may not see any change in tax rates and/or surcharges for individuals in this Budget. However, there is definitely need for a policy review of the same as the maximum effective rate of tax of 42.744% (maximum tax rate of 30% plus 37% surcharge plus education cess of 4%) has certainly been one of the reasons for high net worth individuals (HNIs) looking for tax homes outside India. With these HNIs exiting India, we lose potential entrepreneurial capital, intellectual, professional and technical skills which are vital for innovation and growth of the country. The rationalisation of tax rates may also help increase tax compliance. However, we may need to wait until Budget 2023 for this. Even so, one hopes that policymakers take note of this rationale for rationalisation of tax rates.

    (The author is Partner & Leader - India Region, People Advisory Services (PAS), EY India.)
    ( Originally published on Jan 18, 2022 )
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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