Nirmala Sitharaman introduced new slabs and reduced the tax rate for different slabs for an individual income of up to Rs 15 lakh. In addition she removed dividend distribution tax (DDT), again in line with recommendations of the panel set up for Direct Tax Code (DTC). These are probably initial steps towards implementing DTC in the next couple of years.
The new simplified income-tax regime with low tax rates introduced by the FM was:
- Zero income-tax up to Rs 5 lakhs
- 10% income-tax -Rs 5-7.5 lakhs
- 15% income-tax – Rs 7.5-10 lakhs
- 20% income-tax – Rs 10-12 lakhs
- 25% income – Rs 12.5-15 lakhs
- 30% income-tax above Rs 15 lakhs
The new tax rates are optional for those not availing any exemption.
In another step to simplify the personal income tax system, of the 100 exemptions allowed under I-T Act, around 70 exemptions has been removed under the new regime. The remaining I-T exemptions will also be reviewed in the coming days.
The task force set up for drafting the DTC had recommended sweeping changes to the personal income tax rates. These include lesser exemptions, lower tax rates, removal of DDT, removal of surcharge & cess among other things. The tax slabs proposed were:
- Rs 2.5-10 lakh: 10% (with a full rebate up to Rs 5 lakh)
- Rs 10-20 lakh: 20%
- Rs 20 lakh-2 crore: 30%
- Rs 2 crore plus: 35%
The 10% tax slab extends right up to Rs 10 lakh was expected to bring a significant relief to a large chunk of taxpayers. Currently, there is a 4% cess on total tax and full tax rebate for incomes up to Rs 5 lakh a year. The new DTC had recommended scrapping of the surcharges but retained the tax rebate. This has not been implemented in the latest budget.
The DTC panel had also suggested the removal of DDT. In line with that the FM abolished DDT in the budget. The dividends will be taxed in the hands of recipients as per their tax slab. At present, companies pay DDT at the rate of 20.56%. Mutual funds are liable to pay DDT of 11.648% on equity funds and 29.12% on debt funds. Thus removal of DDT will help small investors immensely & increase payout.
Another major announcement in the budget partly in line with DTC recommendations relates to taxation of NRIs who do not pay tax elsewhere. Firstly, to be categorized a non-resident; an Indian now has to stay abroad for 240 days a year, against 182 previously. In other words, an Indian national, to claim the non-resident status, can’t stay in India for 120 days or more in a year. Secondly a NRI, who is not taxed in the foreign country, will become taxable in India. The government said it is introducing this provision to prevent tax abuse.
The DTC panel had recommended sweeping changes relating to this residency rule. The report has highlighted that the current residence rules, which provide 182 days test for a person to be considered an Indian Tax Resident, are being misused by both Indian citizens and Persons of Indian Origin (PIO). The report has explained how Indians and PIOs – whose major economic activity is in India – plan their stay overseas in a way that they can remain a non-resident forever and avoid paying taxes on their worldwide income, elsewhere & in India. In light of this, the committee had proposed reducing the 182 days residency threshold, to 90 days. The committee had also expressed concern on the concept of ‘state-less’ persons, which is attracting attention of several jurisdictions. It has grimly noted that in 2018, India saw the fourth highest outflow of HNIs from the country and attributes this partly to the prevailing tax environment. So, HNIs who are Indian citizens (but not tax residents) who migrate to tax havens to avoid paying tax anywhere in the world, be considered as Indian tax residents, the report had proposed.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’