'Need to address gap in taxation rates for individuals, corporates'

By Nitin Baijal, Director, Deloitte India; and Sahil Bhasin, Manager, Deloitte Haskins & Sells LLP

It is only a matter of days before the hon’ble Finance Minister (FM) presents the Union Budget 2022 before the Parliament on February 1, 2022. The FM shall be tabling the finances and expenses of the largest democracy of the world. Hence, as part of customary pre-budget consultations, similar to past years, the FM held a slew of meetings with various stakeholders this year as well. One such important meeting was held on December 30, 2021 with state FMs to understand and incorporate their expectations in the upcoming budget.

One of the most common recommendations was rationalisation of individuals’ income tax slabs. The pandemic has led to a high number of job cuts and a reduction in salaries, leading to a fair bit of financial difficulty and cash flow issues for the common man. Hence, more money is required in the hands of people for continued growth of the economy.

To start off, policymakers could focus on bringing more parity in the maximum tax rates for corporate bodies and individuals. At present, the maximum tax rate applicable to individuals earning more than Rs 15 lakh under the simplified regime (Rs 10 lakh under the old regime) is 42.744 percent. For domestic companies with a turnover less than 400 crore, the tax rate is 29.12 percent. The authorities need to appropriately address this steep gap in taxation rates for individuals and corporates.

Moreover, due to the return of travel restrictions to contain the spread of the omicron virus, people are travelling less. Hence, the authorities may consider extending the provisions of the Leave Travel Concession (LTC) scheme. During the initial phase of the Covid-19 spread, the authorities had introduced the LTC scheme for employees to provide a mode of claiming exemption in lieu of Leave Travel Allowance (LTA). However, this was applicable only for Financial Year (FY) 2020-21. Hence, the authorities may want to review and extend this to FY 2021-22 and later years as well.

Another expectation for consideration can be, the threshold limit of 80C deduction. This deduction is claimed by a large part of the population and hence, is important both from a deduction and investment perspective. Therefore, a relook on the deduction is long awaited given that the benefit has not been revised since Finance Act 2014. The deduction may be increased to at least Rs 3 lakh from the current Rs 1.5 lakh to account for the increase in the economy’s growth and inflation.

Further, more corporates seem to be investing into infrastructure with the intention of encouraging the “work from home” culture. Although transportation costs may have reduced, employees are incurring additional expenditure on other things, such as paying internet and electricity charges and buying furniture to create a virtual office at home. Further, normal expenses have increased manifold with an increase in petrol prices, medical bills, school fees, and household expenses. Therefore, regulators may look at enhancing the standard deduction from the current Rs 50,000 to Rs 1,00,000 for employees.

Another tweak that may be contemplated is increasing the exemption on equity shares and equity-oriented mutual funds from Rs 1 lakh to Rs 2 lakh, given the monumental rise in the stock market.

Lastly with the labour codes expected to be implemented in the near future, the net take home of employees may take a hit if some provisions relating to the taxability of contributions to retirement fund are not rationalised. For example, employer contribution towards PF is limited to 12 percent of the basic salary and dearness allowance. However, under the codes, contribution shall have to made on the wages that may also include other salary components. Hence, the FM may wish to review these provisions and provide for rationalisation clauses to ensure that employees are not affected once the codes become effective.