Budget 2023: How The Government Could Woo Taxpayers To The New Regime
The choice to migrate to the new tax regime is more likely when the average taxpayer sees a difference in the payout.
The Union Budget 2023 is likely to carry sweeteners to attract taxpayers to the new tax regime, according to tax professionals.
This anticipation regarding changes related to the new income tax regime has been running high, in part due to Union Finance Minister Nirmala Sitharaman's recent comment that the government has not imposed any new taxes.
Though the new tax regime was introduced in fiscal 2021, there is no publicly available data on the number of individuals who migrated from the old regime to the new regime. BQ Prime's efforts to seek data through an RTI were unsuccessful.
Anecdotal information from audit firms indicate that the transition trend has been slow, partially due to the lack of exemptions and deductions, such as housing rent allowance or life insurance premiums, among others.
The real objective of the new tax regime is to phase out exemptions and deductions and eventually move to a tax regime with comparatively lower rates. This would ensure easier compliance for the taxpayers and reduce the administrative burden on the authorities.
The past filings have shown how the new tax regime hasn’t found favour with tax filers, Archit Gupta, founder and chief executive officer of Clear—a fintech platform that aides with the filing of taxes—told BQ Prime.
"In fact, employers have themselves by default chosen the old regime since it allows taxpayers to take more cash home," he said.
What Can Be Done?
In order to make the new regime more attractive and beneficial to the taxpayers, a few deductions could be allowed, according to Sudhakar Sethuraman, partner at Deloitte India. These could be trackable through PAN-linked payments in particular, such as PF contributions, home loan interest or repayments, he said.
Gupta concurred that a review of the existing and allowed deductions is necessary to make them more suitable for today's tax filers.
Some of the salary benefits should be reconsidered—with nari shakti being a theme, the government could consider a special tax benefit on salary paid to house help/fees paid at day care. Work-from-home deductions must also be considered.Archit Gupta, Founder and CEO, Clear
Do The Slabs Need A Rejig?
Though the tax rate slabs begin at Rs 2.5 lakh annually under the current regime, the effective tax liability is nil for salaries up to Rs 5 lakh per annum.
Under the current tax regime, a resident Indian with an individual total income of Rs 5 lakh or less in a fiscal can claim a rebate under Section 87A. The maximum rebate that can be claimed under Section 87A is Rs 12,500 per year.
The alternative, according to Sethuraman, is that the government can also look at relaxing the slabs to incentivise participation in the new regime.
"The tax rates change with every Rs 2.5 lakh increase in income. In order to make it more beneficial, the new tax regime could expand the slabs to start at Rs 5 lakh and move up for every Rs 3 lakh," he said.
Structurally, tax slabs could either be widened to reduce the overall tax impact on higher slabs or rates could be reduced, resulting in lower taxes to make the new regime more attractive, Sethuraman said.
"This would ensure that the tax rates are more aligned with the rates prevailing in other major economies in the Asia Pacific region," he said.
Considering the rising cost of goods and services, Gupta said income up to Rs 8 lakh should be liable to be exempted by utilising tax benefits. According to him, any revision must balance taxpayer benefit while ensuring the overall revenue position is beneficial or neutral for the government.