Tax for Middle-Income Earners Likely to Change under Direct Tax Code

In November 2017, the Indian government formed a task force to evaluate the current Income Tax Act, 1961 and to recommend a new direct tax code (DTC) as per the economic needs of the country and international best practices. A report was meant to be submitted on 31 July 2019. However, the due date has been extended until 16 August 2019.

Last year, the Finance Ministry appointed Akhilesh Ranjan as convenor of the direct tax panel after Arbind Modi stepped down. India’s Prime Minister, Narendra Modi realised that the Act was drafted 58 years ago and needs re-evaluation. 

The DTC panel has proposed changes to the existing income tax slabs and rates. This will make the income tax slabs more ‘progressive’ and give relief to middle-income earners. It also aims to reform the complex tax laws with lower rates, tax slabs, and lesser exemptions. 

The task force is likely to suggest 10% tax slab for taxpayers earning between Rs 2.5 lakh and Rs 10 lakh annually. An official from the Finance Ministry said that taxpayers may get distributed in four tax slabs along with a cut in allowances by increasing the standard deduction.

The 20% tax rate may cover taxpayers with earnings from Rs 10 lakh to Rs 20 lakh followed by a 30% tax rate for income slabs from Rs 20 lakh to Rs 2 crore.

The super-rich with income exceeding Rs 2 crore, will fall under the 35% tax bracket according to the Union Budget 2019.

The DTC report has also recommended a full tax rebate on or up to Rs 5 lakh. The rebate for earnings up to Rs 5 lakh may increase to Rs 6.5 lakh with respect to the new structure. 

Also Read: Central Board of Direct Taxes rolls out plan for financial year 2020

All these changes will reportedly cost more than Rs 30,000 crore.

Apart from this, the proposal will include huge retirement benefits such as exemption on gratuity up to Rs 20 lakh, leave encashment up to Rs 10 lakh, computation of pension up to Rs 30 lakh, and voluntary retirement up to Rs 10 lakh.

Salaried individuals have received several allowances for many years. The current standard deduction of Rs 50,000 replaced medical reimbursement and travel allowance. Now, the DTC panel suggested that other specific allowances such as food coupons, car maintenance allowances, and phone bill reimbursement should be abolished and the higher standard deduction should be raised to Rs 60,000.

So, the question remains – How will the government sustain by giving out these tax benefits? 

The tax revenue target for the financial year 2019 was set at Rs 12 lakh crore. The Interim Budget 2019, however, revised this target for the financial year 2020 at Rs 13.80 lakh crore, a growth of 15%.

The actual collection that has come in is Rs 11.4 lakh crore. Now, the government has to collect 21% more for FY19 to meet the Interim Budget target. Given the economic slowdown, the target looks stiff and difficult to achieve.

In 2019, India’s economy grew at a five-year low of 6.8% and the data received from the government does not show any significant recovery any time soon. In a situation like this, the DTC panel has suggested more tax relief for all taxpayers.

The tax authorities will have to focus on identifying loopholes to avoid evasion, add newer taxpayers, and look for various revenue sources to meet its spending goals.