New tax rate regime needs reforms: Deloitte's Kasturirangan

While the Union Finance Minister introduced a new income tax regime for individual taxpayers in Budget 2020 with lower tax rates but reduced deductions and exemptions, it has seen few takers in the past three years. Deloitte India’s Partner Saraswathi Kasturirangan tells DH’s Prathik Desai why there hasn’t been much excitement about the new tax regime and the key asks in taxation from Budget 2023.

Why hasn’t the new tax regime taken off?

When a similar approach in terms of doing away with the exemptions and deductions was done for corporate taxes, there was a significant dip at the top rate and it was brought down to a uniform 25per cent, whereas here (personal taxation), we are still seeing the tax rates are not changed.

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Yes, there is some amount of tweaking of the tax rate for income below Rs 15 lakh under the (new tax) regime. But the 30per cent slab even now kicks in pretty early: under the regular tax regime, it is at Rs 10 lakh and under the simplified tax regime it is at about Rs 15 lakh.

The maximum marginal rate, too, is really high at about 42.75 per cent, with tax at 30 per cent plus a 4per cent education cess and 37per cent of surcharge at the maximum. I think surcharges being in absolute percentage terms higher than the tax rate itself does not augur well (for taxpayers). Moreover, surcharges are always meant to be short-term measures to tide over certain specific challenges. But looks like (they) are here to stay.

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What do you seek from Budget 2023 on personal taxation?

If we look at comparable countries where Indians can genuinely shift base to: you can look at Singapore, the UAE, Hong Kong and Malaysia for instance - all of these have got much lower tax rates than India. I think there is something that we need to do more to incentivise Indians to stay invested in India with a clear message that ‘Yes, we value your investments’, by making sure that the tax rates are aligned to those in the neighbouring countries. At the same time, for the simplified personal tax regime, bring a differential tax rate since we are taking away exemptions and deductions. I think this would be the first ask.

Do we need any changes on the interest rates’ front?

There is a lot of hope and demand for increasing the limit to claim interest paid on home loans as deductions. Currently, the set off of interest paid is limited to Rs 2,00,000. That looks a little unreasonable. If I have a let-out property and am incurring a loss from that, the setting off should be allowed, because these are costs that I’m incurring. Given the increased interest rates that we are now facing, I think there is a clamour that this is changed and the amount is increased.

What are the other areas of taxation where you expect reforms?

I would actually expect some focus from the government to boost retail investment in the capital markets. We have limited the exemptions to Rs 1 lakh invested in listed securities. I see, over a period of time, that even for small investors, Rs 1 lakh is not a big number. They worry: “Once I cross one lakh I’m going to get into the tax net”. Even if the tax rate is 10per cent, nobody really wants to get into that. So, in a way, it’s a limiting factor, I would say.

What about changes in capital gains?

It’s time to relook at the capital gains taxation regime. There are multiple thresholds for short-term and long-term and taxation varies based on the nature of the asset (and the time duration for which it is held). It is not very easy for taxpayers to follow. Some amount of rationalisation is required here and I think it’s important for the government to see whether we can simplify things.

For salaried employees, does government need to relook at the standard deduction?

Increasing standard reduction has been an ever-standing demand because the amount there is pretty low. Further, given the inflation, there is definitely a need for it to go up.

The other ask has always been related to Section 80C. The limit to claim deductions under 80C of Rs 1.5 lakh has been there for ages.

It is a corpus that we are all creating for ourselves for our retirement. And we really don’t have any other sort of ‘streamlined social security measure’ to take care of ourselves. Although the National Pension Scheme (NPS) has come in and we do see interest in it perking up, I still think Provident Fund (PF) has got its own sweet spot. There’s still a case for increasing the 80C limit, I would say.

Any other areas where you expect something from the Budget?

On the taxation of stock options. With an accelerated focus on startups, if you look at how startups remunerate their senior employees, typically they won’t have the kind of cash to attract senior talent, but they need the support. This is where the charm of stock benefits attracts senior talent. But there have to be robust rules. I would say there is a strong case to push the taxation of stock benefits to the point of sale. Because at the time of allotment, although there is a benefit in the form of shares, where is the cash to pay it out? So, I think to that extent aligning it to the sale (of stocks) makes sense, more so for startups.