The Center plans to reduce tax rates in the new income tax system

BENGALURU/NEW DELHI : The Ministry of Finance has been trying to soften the personal income tax system without exemption for two years by offering lower tax rates, said a government official, after the new system did not failed to adapt to taxpayers.

At the same time, the government can also phase out the old personal income tax system, which offers several deductions and benefits. This decision aims to simplify the income tax system and reduce litigation, which is considered complex amid several deductions and benefits offered to taxpayers.

Non-exempt personal income tax brackets with lower rates were introduced as an option in the 2020-21 Union budget, but have yet to be widely accepted.

Benefits of the old regime include allowable deductions for personal income tax, including housing rent, life insurance and health insurance. “We haven’t seen much success for the new personal income tax regime without exemptions so far. That’s because individuals calculate their taxes based on both regimes and see which one is beneficial. Those who already have housing insurance or rent would not want to opt for a regime that offers no incentives. There is a need to soften the new income tax regime to find takers,” said said the official quoted above on condition of anonymity.

One of the ideas is to have a wider income range in each of the slabs so that more people benefit from the option for the lower slabs, and moving a taxpayer to the next slabs will only happen with a substantial increase in income.

The official added that there should not be two personal income tax regimes but only one. “We will have to see whether to lower the tax rates or rework the slabs to make it attractive. The tax system will become easier. Disputes will also be facilitated. People who make more money should pay more taxes; those who earn less should pay less,” he added.

The move would be part of the overhaul of the corporation tax regime, which began with the introduction of sunset clauses on several exemptions, including for special economic zones.

In 2019, the government reduced the corporate tax rate from 30% to 22% for existing businesses that had no exemptions and offered a preferential tax rate of 15% for new manufacturing units if they start production until March 2022, which has been extended. a year in this year’s budget. Companies opting for lower tax rates must forfeit all exemptions and incentives.

Likewise, the Center is studying ways to eliminate exemptions in the personal income tax system and, possibly, to eliminate both options and have only one system without any tax advantages.

Emailed questions to spokespersons for the Central Board of Direct Taxes and the Ministry of Finance on Friday went unanswered as of press time.

Under the no-deductions option introduced in FY21, there are six tranches; 5%, 10%, 15%, 20%, 25%, and 30%, versus three under the one with benefits at 5%, 20%, and 30%.

The new personal income tax system should be simple for individuals to understand and choose, as many taxpayers (especially those with annual incomes below 10 lakh) do not seek professional help in filing tax returns, said Amit Singhania, partner at law firm Shardul Amarchand Mangaldas. “Additionally, we need to ensure that the tax regime is not changed very often, as this would also warrant frequent changes in the systems for employers,” Singhania said.

Sachin Garg, Partner, Direct Tax, Nangia Andersen LLP, said phasing out personal tax benefits and establishing a single regime would be in line with government policy to simplify tax laws and bring transparency and clarity. “Even though a new regime with no benefits but with lower tax rates was introduced last year, most taxpayers chose to continue with the old tax regime as it results in lower tax The government will have to play a balancing act to ensure that any increase in tax payable due to the phasing out of exemptions is offset by the reduction in tax rates,” Garg said.

Opposing the exemptions, Revenue Secretary Tarun Bajaj said in February during an interaction with the industry that the new regime without exemptions would never take off if the government continued to grant exemptions. He also said the government would see how it could bring parity between the new exemption and the old personal income tax regime to encourage more people to switch to the new one. He also spoke of the need to simplify the laws on direct taxation, as various exclusions or exemptions announced each year complicated them.

Under the new tax regime, an annual income of up to 2.5 lakh is exempt, while a 5% tax applies on annual income between 2.5 to 5,000,000. An income of 5-7.5 lakh attracts reduced tax rate of 10% and 15% for income between 7.5 million and 10,000,000.

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