Finance Minister Nirmala Sitharaman will present the Union Budget on February 1 in the backdrop of a sharp slowdown in India’s economy. The country’s GDP grew at just 4.5 per cent in the July-September quarter. While private sector investment had already been muted for last few years, a slowdown in consumer demand put further pressure on the economy. Therefore, all eyes will be on how Sitharaman looks to revive consumption in the Budget this year.
To attract private sector investment, in September corporate tax rate was reduced to 22 per cent from 30 per cent for existing companies and to 15 per cent for new manufacturing companies incorporated after October 1, 2019. There is an expectation that the finance minister will announce a similar relief in individual income tax, too.
“One of the major focus of the government in the Budget would be to increase the disposable income in the hands of individual taxpayers and push the consumption cycle. In this backdrop, it would be fair to expect a more liberal personal tax regime particularly for lower income slabs,” said Suresh Surana, founder of RSM India.
Currently, the base tax rate for annual income between Rs 2.50 lakh to Rs 5 lakh is 5 per cent, which increases to 20 per cent for income above Rs 5 lakh up to Rs 10 lakh. Income above Rs 10 lakh is taxed at 30 per cent, plus there is an additional surcharge on individuals whose income is Rs 2 crore or more.
The additional surcharge announced in the Budget in last July led to the maximum tax rising to Rs 42.744 per cent. There is a hope that the surcharge would be subsumed in the overall tax rate and the maximum rate may be lowered to 35 per cent. There is an expectation that the tax slabs will be recast too.
“It is understood that the Direct Tax Code (DTC) task force had recommended a revised tax slab rate structure, wherein the tax rate upto Rs 10 lakh would be 10 per cent (with a full rebate upto Rs 5 lakh), Rs 10-20 lakh would be taxable at 20 per cent, Rs 20 lakh to Rs 2 crore would be taxable at 30 per cent and income above Rs 2 crores at 35 per cent,” said Surana.
Indians have been traditionally known to save. The country’s savings rate is close to 30 per cent. Yet, barely 2 per cent invest in equity or equity linked instruments. Insurance penetration is also low, as very few people actually buy a insurance policy.
Experts say, an additional exemption for insurance beyond what is currently available under Section 80C of the Income Tax act could help.
“Some constructive steps which can create the right environment include creating a separate limit for tax deduction in addition to Rs 150,000 available under section 80C,” said G Murlidhar, managing director of Kotak Life Insurance.
Vineet Arora, MD and CEO of Aegon Life Insurance says a separate rebate of Rs 25,000 to buy term insurance plans, could help incentivise people to insure themselves.
Investments up to Rs 50,000 made in the National Pension System currently get additional exemptions under Section 80CCD. Murlidhar says there should be similar deduction available for life insurance pension plans to ensure parity in tax treatment for pension products across platforms.
There is also a case to make annuities tax free. Currently, the annuity or regular income that a retiree earns on an insurance pension plan is taxed as per his or her tax slab at the time of retirement.
“Given the overall economic volatility and its impact on retirement savings, the government must use this budget as an opportunity to encourage financially sound retirement plans by making all annuities upon maturity of a policy or a pension fund tax free,” said Arora.
However, given that the government is already falling short of its targeted Goods and Services Tax (GST) and direct tax collections, the room that Sitharaman has to lower taxes is limited. Therefore, it will be key to see if the finance minister focuses on fiscal consolidation or looks to boost spending by lowering tax or other incentives.
