Why the new tax regime has failed to enthuse many taxpayers

On November 26, the finance ministry sought ‘ideas and suggestions’ from the general public. While considering the new ideas and suggestions, the past-simplified income tax measures, taking stock of their effectiveness and acceptance by the same public will be much helpful. Up to Financial Year (FY) 2019-2020 and Assessment Year (AY) 2020-2021, there was only one tax regime for individuals and HUF class of taxpayers. They were allowed to apply specified slab rates as per relevant finance act on their total income after allowing a number of deductions and exemptions.

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The Union Budget 2020 has introduced an optional ‘exemptions-free tax regime’ with the concessional tax rates’ for the said two categories of taxpayers from AY 2021-22 onwards by not allowing certain specified deductions and exemptions. In other words, the Union government has done away with 70 odd tax deductions and exemptions.

As a result, currently, there are two tax systems in operation simultaneously, one is the old regular tax regime with all applicable deductions and exemptions and another one is the new optional ‘exemptions-free tax regime’.

New optional exemptions-free tax regime

The most common deductions and exemptions available for taxpayers are PPF, EPF, NPS, life and health insurance premiums, principal and interest component of housing loans, and children’s tuition fees. Similarly, exemptions point of view, House Rent Allowance (HRA), Leave Travel Allowance (LTA), leave encashment and Standard Deduction.

Interestingly, the new tax regime does not allow exemptions / deductions on interest earned from saving accounts, interest component of housing loan paid for self-occupancy, deductions for housing rent allowance, leave travel allowance, family pension, and Standard Deduction, which was availed by almost all taxpayers over the years.

Findings from field research

The writer has approached the city-based five chartered accountant firms who have filed 250 to 750 individual income tax returns during the last two AYs each. Interesting findings can be summed up as follows:

1. Those who have a total income of Rs 10 lakh and below have (irrespective their age) opted for the ‘old-tax regime’ since it won’t make any difference to them either under old or new regime.

2. Those who are in the income bracket of Rs 10 lakh and Rs 30 lakh (ages 40 to 60) with tax-saver investments, HRAs, housing loans, and other financial commitments preferred the old regime instead. Similarly, early-age earners (ages 25 to 40) with no such commitments have chosen the new regime. However, they won’t hesitate to return to the old regime depending on their future financial commitments.

3. Taxpayers having rental income and income from other sources have chosen the new tax regime since it was easier and less complicated.

4. Taxpayers with savings, happy independent retirement life, and conservative mentality are wishing to stick to the old regime ‘forever’ unless there is no other option left.

5. Overall 33 to 37% of taxpayers - may be likely figures for pan-India - have moved to the new regime.

Similarly, the writer has also approached 500 individuals who have filed returns by themselves during the same period with a preset of five questions:

1. Whether you opt for the old or the new regime? About 35% of respondents have moved to the new regime given reduced rate of taxes, less compliance, increased liquidity, and do not wish to prefer to park their funds in prescribed instruments for a specified period.

2. After two AYs / return filing seasons, still wish to continue with the old regime and why? About 65% told affirmatively by giving the previously mentioned initial finance and other reasons.

3. Are you ready to switch to the new regime, say, in another three to five FYs, given that it is more attractive than the current old regime? Since no such restrictions on individuals to switch over, it will be considered from next AY itself subject to how it is going to be beneficial for them in the long term.

4. Do you wish to continue with the old regime forever? If at all, the old regime co-exists with the new regime? Yes, the majority of taxpayers having long term housing loans, investment compulsions, children’s education, daughter’s marriage, ambitions of acquiring immovable and high-end immovable properties, etc preferred to continue with the old regime.

5. Who is influencing you to continue with old or switch to the new regime - your own decision or tax professionals / CAs? Most of the salaried employees, although chose the new regime at the time of declaring their tax savings info to their HR for TDS purposes, did U-turn while filing the returns as per their own instinct and others simply followed the guidance of their tax advisors.

Concluding Remarks

From the above, it is clear that the new tax regime failed to enthuse a large number of taxpayers. As Tarun Bajaj, former revenue secretary of finance ministry, said days before retiring from the service, ‘there is need to have a rethink’ on the new-tax regime. With less than two months to go for the presentation of the Union Budget 2023 and buoyancy in direct tax collections, likely to exceed the budget target of Rs 14.20 lakh crore by about 30%, it is high time for the finance minister and her budget team to take some holistic views and make new exemption-free tax regime more attractive.

(The author is the founder and chief executive officer of Shree Tax Chambers)