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Considering India's growing economy and expanding global footprint, it is important to align various tax policies as per the business needs of both domestic and foreign taxpayers.
The government has taken steps over the past few years to simplify the tax regime and incentivise businesses and individuals by offering multiple tax incentives and enabling ease of compliance. The common man continues to have expectations from the upcoming budget, especially with respect to the simplification of tax provisions and compliance.
This will ultimately contribute to bringing more people under the tax base as well as ease the administration burden for the tax department.
Some key expectations related to tax policy changes are summarised below:
The government has taken multiple steps in the past in terms of simplifying the individual tax regime such as the introduction of a new regime with lower tax rates on forgoing various deductions/exemptions. The new tax regime takes away the burdensome requirement of maintaining investment/expense-related documents.
The government raised the basic exemption threshold to Rs 3 lakh under the new tax regime through the Finance Act, 2023. This was supplemented by a rebate on tax such that income of up to Rs 7 lakh is virtually tax exempt under the new regime.
The mechanism of first taxing income and then applying a rebate may be simplified for ease of compliance. Further, in order to promote higher adoption of the new tax regime, tax slabs may be widened so that the average effective tax rates are lower than those under the old regime with tax deductions/ exemptions.
The growing economy and foreign investments in India are likely to increase investments in capital assets across various categories. Currently, the capital gains tax regime is fairly complicated, with different rates for various asset categories. Simplifying the capital gains tax regime would go a long way in bringing ease of compliance and administration.
Increase in standard deduction
Standard deduction was brought back in Budget 2018 with a cap of Rs 40,000. The limit was increased to Rs 50,000 to incentivise individual taxpayers. The benefit of such standard deduction was extended to the new tax regime in Budget 2023.
Given the high rate of inflation and the increase in living expenses of salaried individuals over the past few years, the standard deduction of Rs 50,000 is very low. As a result, periodic revisions to standard deduction are essential to account for the rising cost of living for the salaried class.
Extension of deduction for interest paid on electric vehicle loans
Section 80 EEB of the Income Tax Act, 1961, was introduced in Budget 2019 to promote the use of electric vehicles for a safer environment. The provision allowed deduction of up to Rs 1.5 lakh for interest paid on loans taken to buy an electric car, provided the loan was approved in the period from January 1, 2019, to March 31, 2023, subject to certain other conditions.
The eligible time frame for the purchase of electric vehicles should be extended beyond March 31, 2023, and given in the new tax regime to promote eco-friendly living.
Ease of compliance
Here are suggestions for policy-level changes to make tax compliance easier:
Address concerns faced while claiming tax treaty benefits
There should be specific provisions to allow foreign tax credit while withholding tax on salary. Presently, in the absence of these provisions, an employer withholds tax on the entire taxable salary even when the employee is eligible for foreign tax credit due to doubly taxed income in India and another country. This results in huge refund claims in the tax return form, impacting cash flows for individual taxpayers.
Section 90 (4) of the Income Tax Act mandates the requirement to obtain a tax residency certificate from the government of the country of residence in order to avail tax treaty benefits. However, this requirement should be done away where other supporting documents like foreign tax returns are available to prove tax residency.
Enhance revised tax return filing timeline
Owing to technology updates and faster tax-return processing, Budget 2021 reduced the timelines for filing belated/revised tax returns by three months.
However, longer revised return timelines for residents reporting foreign income and taxes should be provided in cases where foreign income is also liable to tax in India in the hands of individual taxpayers.
In India, the due date to file income-tax returns for an individual is July 31 of the following financial year, which may not coincide with the other country's tax filing due dates.
Due to different tax years followed by every country, an individual who is an ordinary resident of India for any financial year may not have the details of his/her foreign taxable income and corresponding foreign taxes by the time he/she files India tax returns for that financial year.
Simplify withholding tax guidelines
The act presently provides more than 30 provisions for deducting tax at source, which comes with multiple slabs and rates and thus, increases complexity. Many classification and interpretation issues have been flagged by the industry in the past years, which should be addressed in this budget.
As we approach the date of presenting Budget 2024, all eyes will be glued to see how individual taxpayer expectations are provided for.
This article first appeared in Moneycontrol.com on 18 January 2024.