The impact of the Tax proposals for the Individual and Corporate Tax payers
- Tax Rate slashed for small tax payers: Personal Income Tax slab reduced for individual tax payers having taxable income between 2.5 lakhs to 5 lakhs to 5% instead of present 10%. This will provide a flat rebate of INR 12,500 to the entire 1.92 crore individual tax payers. Adding up the education cess and higher education cess to this savings, the gross savings for most of the tax payers will be to the tune of INR 12,875.
- Rebate slashed and limit curtailed: The rebate under section 87A was available for a.y.2017-18 of INR 5,000 for individual tax payers having taxable income upto INR 5 lakhs. This rebate has been reduced to INR 2500 for individuals and will now be limited to individuals having income upto INR 3.5 lakhs only. This will set off some benefit out of the reduction in tax rates for those who fall under the bracket of INR 3.50 lakhs to 5.00 lakhs.
- Unlimited deduction for interest on housing loan capped: Individuals who had let out property could claim deduction for interest on housing loan paid without any limits to be set off against their salary and other income. However, this limit has now been capped at INR 2 lakhs to make it at par with the deduction available for self-occupied property. The unadjusted losses, however, can be carried forward to be set off in the next 8 assessment years.
- Holding period for LTCG reduced: The holding period for holding immovable property for considering it as Long Term Capital Gain has been reduced from 3 years to 2 years. It means that the homeowners can liquidate their property earlier and pay the LTCG at 20% with indexation instead of the marginal rate.
- Base Index for LTCG shifted: The base year of indexation for LTCG has been shifted from 1.4.1981 to 1.4.2001 for all classes of assets including immoveable property. This move will result in more realistic computation of indexed acquisition cost which will surely reduce the tax liability substantially.
- Expansion of financial instruments to claim deduction from LTCG: The list of financial instruments in which an individual tax payer can invest to claim deduction from payment of LTCG u/s 54E is proposed to be expanded by the Government. This enhanced list will give more opportunities of investment for the tax payer.
- Surcharge levied for middle income slab: A new surcharge of 10% has been levied for individual tax payers having taxable income between INR 50 lakhs to INR 1 crore. This provision will set off some benefit out of the reduction in tax rate in the first slab for those who fall under this slab.
- Surcharge for the highest slab to continue: The surcharge of 15% presently levied for individual tax payers having taxable income above INR 1 crore will continue. This would effectively mean that the reduction in tax rate at the first slab will benefit this class of tax payers the most, being benefited by INR 14,000 including the flat rebate of INR 12,500 plus surcharge plus cess.
- Simplification of Income Tax return form: The Government will introduce a simple one page IT returns for individuals having taxable income below INR 5 lakhs other than business income. It is very likely that this form will be similar to the one page SARAL form which was introduced many years back.
- No scrutiny for first time tax filers: Individuals filing IT returns for the first time shall not be subject to any scrutiny assessment by the IT department unless the department has information of any high value transactions not declared in the returns. This move will surely induce many more individuals to start filing their tax returns.
- Penalty for non-filing of returns on time: Stricter rules have been set for making people file their Income Tax returns on time. There will be a fee of INR 5,000 levied if the returns hare not filed before the due date but filed upto 31st December of that assessment year. If the returns are filed even after this date, the fee shall be INR 10,000. However, if the taxable income is below INR 5 lakhs, the penalty shall be restricted to INR 1,000.
- Ban on high value cash transactions: No transaction in any form above INR 3 lakhs will be allowed in cash. This move will substantially reduce the cash transactions in several sectors very prevalent today.
- Reopening of cases for scrutiny period extended: The Income Tax authorities can now reopen cases upto 10 years back if the search and seizure operations (scrutiny) reveal undisclosed income and assets worth over INR 50 lakhs. The period of re-opening cases was restricted to 6 years till now.
- Plugging loopholes in fudging rent receipts for HRA claim: Furtherance to the rule brought in 3 years back that the landlord’s PAN is mandatorily required to be provided if the annual rent exceeds INR 1 lakh, it has now been made mandatory to deducted tax at source, if the rent exceeds INR 50,000 a month. This move will make salaried tax payers even more difficult to fake rent receipts to claim HRA exemption.
- Early withdrawal from NPS to be tax-free: Early withdrawal from the National Pension Scheme will not attract tax anymore to the extent of 25% of the NPS subscriber’s contribution to the corpus for any emergencies before retirement.
- Parity between salaried and self employed for NPS contribution: Non-salaried and self-employed individuals can now contribute upto 20% of their gross total income to the NPS. This move has brought them in par with the salaried class who are allowed to contribute 10% of their income and their employer contributes another 10%.
- Lower tax rate for MSMEs: The micro, small and medium enterprises will now enjoy a 5% cut in their income tax rates. Small and medium companies with a turnover upto INR 50 lakhs will now be taxed at 25% against the existing rate of 30%. This rate cut will surely make them more competitive. However, a strange fall-out of this provision is that a company with a turnover over this limit will pay more tax on the same net profits as compared to a company with a lesser turnover.
- MAT not to be removed, carry forward period extended: Minimum Alternate Tax is applicable for zero-tax companies, and such companies will now get an extended leeway to set off this MAT against future tax liabilities. MAT credit can now be used for a period of 15 years instead of the existing 10 years.
- Cash donations to political parties restricted: The requirement of maintaining records of political donations received by political parties above INR 20000 had to be maintained. Now (a) the maximum amount of political donations that a political party can receive will be only INR 2000 from any one source; (b) Political parties will be entitled to receive donations by cheque or digital form; (c) an amendment is proposed in the RBI Act for issuance of electoral bonds where people can purchase these bonds from any nationalised bank and these can be redeemed only in the bank account of the political parties; (c) all political parties will have to file IT returns within the due date of filing returns; (d) If the above conditions are not met, political parties will lose benefit of income tax exemption on its income.
- Start-ups to get more time to choose their tax holiday: The profit linked deductions available to early-stage start-ups has been relaxed. They will now be allowed to claim the tax holiday on any 3 consecutive years out of 7 initial years instead of 5 years. However, this is applicable only for companies registered between April 2016 and March 2019.
- Increase in threshold limit for maintaining books of accounts: The provisions of section 44AA has been amended to increase the monetary limit of income from INR 1.20 lakhs to INR 2.50 lakhs and total sales or turnover from INR 10 lakhs to INR 25 lakhs for maintenance of books of accounts by Individuals and HUFs.
- Presumptive net profit limit reduced for income received by banking mode: Under the presumptive taxation under section 44AD a sum equal to 8% of the total turnover or gross receipts is considered as deemed profits chargeable to tax. This section has been amended to provide that in case of income and/or receipts received through the banking mode, the deemed net profits will be only 6% instead of 8%. However, it will continue to be 8% for income received by any other mode.
- Cash expenditure limit reduced: The threshold for cash expenditure for both revenue and capital expenditure under section 40A in a single day reduced from INR 20000 to INR 10000. Now, such expenditure above this reduced limit shall not be allowed as a deduction in computing income under the head “Income from Business or Profession”.
- Cash donations restricted: The limit for allowing cash donations as a deduction under section 80G reduced from INR 10000 to INR 2000. This will provide for cash less economy and more transparency in donations given to charitable trusts.
- Time limit for filing revised returns reduced: The time for furnishing revised returns under section 139(5) shall now be available only upto the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. This will surely expedite the assessment proceedings by freezing the filing of the returns by the end of that assessment year.
- Time limit for completing assessment reduced: Under the existing provisions of Section 153(1), the assessments under section 143 or section 144 could be completed within 21 months from the end of the assessment year. As fallout of the amendment of provisions for filing revised returns, for assessment year 2018-19, this time limit is reduced to 18 months, and from assessment year 2019-20 onwards, to 12 months from the end of the assessment year.
FCA, Grad. CWA, CS, DBM