nion Finances 2020 launched a brand new tax regime, which got here into impact from FY 2020-21.Taxpayers had a selection between the outdated regime with varied deductions and exemptions and the brand new tax regime that provided decrease tax charges for individuals who had been keen to forgo exemptions and deductions. The intention behind this transfer was to offer vital reduction to the person taxpayers and to simplify the income-tax regulation.
Usually, an worker is predicted to make a declaration to the employer at first of a monetary yr as to which exemptions and deductions they want to declare. Primarily based on this declaration, the employer deducts TDS (tax deducted at supply). Over the last monetary yr (FY 2020-21), most employers pre-selected the outdated tax regime for workers, except the worker made an specific request for the brand new tax regime. Why would the employer pre-empt the outdated regime for the worker? It is because a lot of staff declare HRA (home lease allowance) or go for reimbursements for phone and/or broadband, gas and a number of other different eligible advantages. Additionally, a lot of them pay insurance coverage premiums (56% of the filers on clear paid medical health insurance premium in FY 2020-21). Almost everybody contributes to worker provident fund (EPF) (eligible as a deduction beneath part 80C), since that is mandated by regulation. Employers may see that staff benefited from being within the outdated regime.
Additionally, most staff are capable of make the most of the part ₹1.5 lakh restrict of 80C even with out making voluntary investments. It is because an worker’s contribution to EPF is eligible beneath part 80C.
A easy evaluation of the 2 regimes reveals that by making small changes (claiming exemptions) to their wage and claiming some deductions beneath part 80C, nearly all taxpayers would profit from being within the outdated regime. Lower than 10% of filers on Clear have opted for the brand new regime.
Now that we’re approaching finances 2022, it’s time for the federal government to analyse and consider the brand new tax regime. To enhance tax compliance there are some things the federal government can think about.
One regime with decrease tax burden: Given the backdrop of strong tax collections (as per authorities knowledge, web direct tax collections have elevated by greater than 60% in fiscal 2021-22), it’s time the federal government take a deep take a look at tax charges, and cut back the tax burden within the outdated regime. One of many methods is to increment normal deduction yearly based mostly on inflation. Commonplace deduction permits salaried taxpayers a flat deduction with out submission of any proof.
Supply extra option to taxpayers: One of many claims of the brand new tax regime was that it permits taxpayers the next money move (albeit extra tax payout) and the liberty to put money into merchandise of their selection. Regardless that 80C permits a bunch of investments and bills as deductions, but most choices require a excessive lock-in, are usually not fairness linked and maybe could not discover favour with those that are flexibility on exit.
The federal government should think about a separate part the place taxpayers can declare different kinds of investments. Even NPS (nationwide pension scheme) must be stored out of Part 80C and luxuriate in an equally increased exemption of ₹1.5 lakh. Taxpayers can then be allowed a selection between 80C and a brand new part i.e. conventional merchandise vs new age funding merchandise. This might supply taxpayers extra selection with tax saving and in flip increased liquidity.
Enable work at home bills, take away redundant tax breaks: The easiest way to scrub up and supply a less complicated tax regime is by eradicating redundant exemptions reminiscent of youngsters’s schooling allowance ( ₹100 per 30 days per little one as much as a most of two youngsters), hostel expenditure allowance ( ₹300 per 30 days per little one as much as a most of two youngsters) and permitting deductions for individuals who work at home and have seen bills for electrical energy, broadband, meals, and so forth. shoot up in the course of the pandemic years. Our tax exemptions now require a whole overhaul according to our must favour the brand new workforce who work in startups and like to work flexibly. They want tax advantages to assist them purchase devices and family items in addition to tools to work at home easily.
Take away compliance boundaries: This yr was troublesome for tax filers as a consequence of glitches within the newly launched e-filing tax portal. This was additionally the yr the federal government launched AIS. Many taxpayers lament that the compliance burden has elevated with two types to be reviewed, Type 26AS and AIS. With the due date for tax filings for FY 2021-22 round 6 months away, it’s time for these two types to be merged and consolidated into one. A secure portal and easy expertise makes tax submitting a nice expertise for taxpayers and professionals.
Archit Gupta is founder and CEO, Clear.
Supply: Live Mint