Battered Taxpayers Need A Fiscal Stimulus: Some Low-Cost Options

India is in the midst of the second wave of the coronavirus pandemic, and the rise in cases is too steep and sharper than the first wave.

There has been a surge in hospitalisation of patients in addition to those suffering the long-term consequences of Covid.

This second wave has adversely affected the lives and livelihoods of a large number of people, particularly the middle-class population, the low-income groups and the economically weaker sections.

If any family member tests positive for Covid-19 or has to be hospitalised, the family has to manage the challenges of getting the member admitted to a hospital considering the shortage of beds, getting the oxygen supply and medicines, if required and arrange for the finances too.

Many people have donated large sums of money for pandemic relief and society has largely taken care of the crisis in multiple ways. There is good community relief and it should be encouraged and appreciated by the government.

Under the existing income tax regime, an individual can claim deductions under section 80G for donations made to certain funds, charitable institutions, etc. However, the total deduction is restricted to the lower of the amount of donation or 10 per cent of the taxpayer’s adjusted gross total income.

The revenue impact for the government from Section 80G deduction by individual/HUF taxpayers in financial year (FY) 2018-19 was Rs 1,062 crore, about 1.1 per cent of the total amount of incentives of Rs 95,377 crore for that year.

The government should increase the deduction limit from 10 per cent to 30 per cent for this year only so that more individuals are able to donate and take the deduction.

The annual tax deduction towards payment of health insurance premiums by the taxpayer and his family under Section 80D is limited to Rs 25,000.

In addition, the taxpayer can claim annual tax deduction up to Rs 25,000 on health insurance premiums paid for parents.

However, if the taxpayer or his parents are senior citizens, then the annual deduction limit is increased to Rs 50,000.

During the pandemic, many individuals have taken additional insurance cover for Covid treatment. The insurance premium amount has increased over the past five years.

The revenue impact for the government from the Section 80D deduction by individual/HUF taxpayers for FY 2018-19 was about Rs 4,775 crore, about 5 per cent of the total amount of incentives for that year. The government should consider doubling the limits under Section 80D.

The “Income Tax Return Statistics” for various assessment years published on the CBDT homepage reveal that salary income is the highest source of income reported by individuals over the four financial years from 2014 to 2018 (latest available data).

An analysis of the tax returns filed by individuals over the four FYs (2014-18) clearly indicate that salary income is more than double of business income, in the income slabs exceeding Rs 2.50 lakh.

The salaried class is subject to tax deduction at source on their entire income even before their salary is paid to them, resulting in reporting of appropriate income.

The average per capita salary income was Rs 7.94 lakh in FY 2017-18 whereas the average per capita income from business or profession of individuals was Rs 5.14 lakh. It appears that the business incomes of taxpayers have much more leeway to write off expenses.

The government of India introduced a new lower income tax regime for individuals from FY 2020-21, in addition to the existing tax regime. Both regimes have separate tax slabs and rates.

The existing tax regime has four slabs whereas the new lower tax regime has seven tax slabs. Both the tax regimes have an exemption for income up to Rs 2.50 lakh and no tax will be payable on total income up to Rs 5 lakh. There is no change in the rates of surcharge, and health and education cess.

The Finance Act, 2020 provided an option to individuals to pay income tax at lower rates only if they don’t claim specified exemptions or deductions such as house rent allowance (HRA), leave travel allowance (LTA), payment of life insurance premia, repayment of the principal amount of a housing loan; payment of interest on a housing loan for a self-occupied property; deduction for health or medical insurance premium, donations under Section 80G, etc.

Deductions up to Rs 50,000, normally available to senior citizens for interest from post office and banks, will also not be available. About 70 deductions and tax exemptions will not be available under the new lower tax regime.

Covid-19 has enormously increased the health cost paid by taxpayers. The salaried class is deeply hurt by the increased medical expenditure during this pandemic which cannot be set off against their income for tax purposes, whereas the business class is able to offset much of this expenditure.

As a measure of relief to middle-class taxpayers, it is suggested that the number of income tax slabs without specific exemptions or deductions be reduced from the present seven to four slabs as follows:

This will provide relief to a larger number of people by giving them more cash to manage the Covid-19 crisis, simplify the tax and the impact on revenue will be minimal. It is hoped that individuals who declare business income will become more transparent.

This should incentivise individuals who declare business incomes to become more transparent and declare their full incomes, resulting in greater compliance from them in the future.

A large number of jobs have been created in the technology and startup sector. It is expected that these two sectors will hire between four to five lakh engineers this year. Including jobs in supply chains and delivery, job creation could go up to 10 lakh this year.

Some 14 unicorns have already been created so far this year with a total going up to 56 unicorns, and the number could go up by another 20 by the end of the year. But sadly, India may become a digital colony because of the disincentive for Indian taxpayers to invest in start-up companies due to high taxes.

It is suggested that the government incentivises Indian investment and create jobs by removing the blatant discrimination in tax treatment of unlisted shares with listed shares.

To qualify as a long-term capital asset, the holding period for unlisted shares is 24 months compared to 12 months for listed shares. Long term capital gains (LTCG) taxes on the sale of listed shares are 10 per cent while it is 20 per cent for unlisted shares.

Considering that angel investors having annual taxable income of over Rs 5 crore generally invest in start-ups, the LTCG tax for them after surcharge and cess would be about 28.5 per cent, whereas it is about 12 per cent for LTCG on listed shares, about 2.4 times higher.

To provide an incentive to domestic investors to set aside a portion of their investment corpus towards start-up companies, a tax regime as applicable to listed shares should be extended to unlisted shares.

The holding period for unlisted equity shares should be reduced to 12 months to qualify as a long-term capital asset. The LTCG tax from unlisted shares should be 10 per cent and the enhanced surcharge exemption should be extended to LTCG from unlisted shares also.

These measures will act as an economic vaccine for battered taxpayers and the government should announce these measures at the earliest so that middle-class taxpayers are left with more money to address the pandemic challenges.