Taxpayers earning between Rs 5 lakh and Rs 10 lakh per year may be in line with the Task Force on Direct Taxes Code for major tax relief, which suggests reducing the tax rate to 10% for them. Could, two people said on condition of anonymity.
To be sure, this is still just a suggestion, and it is unclear whether the government, which focuses too much on increasing its tax revenue, will accept it.
The task force submitted its report last week and recommended that the government increase the number of tax slabs or tax brackets from four to five, but reduce tax rates for many.
There has been no change in the first income tax slab (up to Rs 2.5 lakh per year), which attracts zero tax. The current second slab (Rs 2.5 lakh to Rs 5 lakh) attracts 5% tax. The task force wants to expand this slab (Rs 2.5 lakh to Rs 10 lakh) and has a 10% tax rate while retaining the full tax exemption available to those earning up to Rs 5 lakh, Taxpayers.
“Effectively, people having income up to Rs 5 lakh will have to pay zero tax. Tax will be charged for income between Rs 5 lakh and Rs 10 lakh at 10%, and an individual can save up to about Rs 37,500 a year (at the higher end) under the proposed regime,” one of the persons cited above said.
Currently, people earning between Rs 5 lakh and Rs 10 lakh are taxed at the rate of 20%. The proposed third slab (Rs 10 lakh to Rs 20 lakh) will attract a tax of 20%; The first person said that if his income is on the upper side, then the taxpayers is expected to give a profit of about Rs 1 lakh. People currently pay 30% in this slab (the current slab is Rs 10 lakh and above).
The panel has proposed a fourth tax slab of Rs 20 lakh to Rs 2 crore that will attract a tax rate of 30% and the fifth slab, Rs 2 crore and above, will attract a rate of 35%. Under the current regime, the rate is 30% for people whose incomes fall in these slabs. If the proposal of the committee is accepted, a person earning Rs 2 crore will save around Rs 8.5 lakh.
This is, of course, assuming that there are no surcharges on tax. Currently, for instance, people whose incomes fall in the higher tax slabs pay the surcharge.
The Central Board of Direct Taxes (CBDT) did not answer of queries. A government official stated on condition of anonymity that the report presented by the task force is yet to be evaluated and that it isn’t necessary to allow all recommendations.
The government constituted the task force on the Direct Tax Code in November 2017 to review the existing income-tax legislation and to draft a new direct tax law in consonance with the economic needs of the country. “The recommendations have something for every taxpayers. But, exact profits can be measured after one is clear whether the panel proposed to remove cess and surcharge or not,” chartered accountant Jitender Chhabra said. Currently, with surcharges and cess, a person earning over Rs 2.5 crore pays tax at an effective rate of 42.7%.
“Even if there is a small shortage, it will put more money in the person’s pocket. I think it will push aggregate demand. It will boost production and act as a much-needed boost for the economy. Sanjay Kumar, senior director, Deloitte Haskins & Sales LLP, said, but this is only one aspect as there is other encouraging news.
“Overall, the personal tax collection will be below Rs 50,000 crore or just about the rate reduction. But the personal income tax is currently very upbeat, and so with the growth in the economy that tax gap will be easily filled. Also, “The rate reduction will have a good effect on compliance, and economic growth also – the Laffer curve effect,” he said.
His reference is Reagan era economist Art Laffer’s hypothesis that if tax rates are too high, people will now be motivated to work harder and earn more because most income will be going to the government, and instead opt for a lower salary, but a better quality of life. Tax rates that are too high, Laffer argued, would therefore actually reduce the government’s overall tax revenue.
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