Buoyant Tax Collections Cushion Government On Fiscal Front
Riding on the back of a 26% surge in tax collections, the government is set to unveil the next set of reforms in tax administration.
Riding on the back of a 26% surge in tax collections, the government is set to unveil the next set of reforms in tax administration by pruning the number of forms available for filing an income tax return, or ITR, to improve taxpayers' experiences and reduce the time taken to file returns.
Both direct and indirect tax collections have been buoyant in 2022, a clear indication of the revival of the economy after the pandemic and also as a result of government efforts to plug tax leakages.
Going forward, as it seeks to tighten the noose around evaders, the government may also look at stricter tax deduction norms for e-commerce and online service providers, besides online gaming.
Taxation of the digital economy, ensuring developing countries get their fair share of taxes, and global coordination for taxation of cryptocurrencies would be one of the priority areas, as India is all set to host the leaders of G-20 countries next year.
The rationalisation of the long-term capital gains tax structure is also expected to result in similar asset classes having the same holding period. Currently, shares held for more than one year attract a 10% tax on long-term capital gains.
Gains arising from the sale of immovable property, unlisted shares held for more than two years, and debt instruments and jewellery held for over three years attract 20% long-term capital gains tax.
The new tax regime is also expected to be tweaked next year, as the government seeks to make the exemption-free tax regime more appealing to individual income taxpayers.
In the longer run, the government wants to do away with the complex old tax regime by establishing a new system devoid of exemptions and deductions.
Moving in that direction, the Union Budget 2020-21 gave taxpayers the option to choose between the old regime with various deductions and exemptions and the new tax regime that offered lower tax rates without exemptions and deductions.
Even after two years of it coming into effect, the new tax regime has not taken off, and the I-T department is now considering some tinkering with it so that more taxpayers shift to it.
The gross collection of direct taxes (before adjusting for refunds) till Dec. 17 of the current fiscal stood at Rs 13.63 lakh crore, a rise of 26% over the same period of 2021–22 on robust growth in advance tax payments and TDS deductions.
After adjusting for refunds, the net collection of tax on corporate and individual earnings has jumped nearly 20% to Rs 11.35 lakh crore, which is about 80% of the full-year budget target.
The tax authorities are working on a common ITR form for most taxpayers, and the current forms, i.e., ITR-1 and 4, for individual taxpayers will continue.
The taxpayers filing ITR-1 and ITR-4 will have the option to choose which form they want to use when filing their tax returns—the proposed common ITR form or the existing ones.
Currently, there are seven types of ITR forms filed by different categories of taxpayers.
Rising tax revenues also give a fiscal cushion to the government on the fiscal front as it more than make up for the shortfall in the budgeted disinvestment target set for the current fiscal.
Nangia Andersen LLP Partner Sandeep Jhunjhunwala said this budget is unique, being the post-COVID-19 recovery budget and the last full-year budget from the second term of the current government ahead of the Lok Sabha elections to be held in 2024.
"As the disparity between the personal tax rates and corporate tax rates has widened over the years, it would only be fair if the grief of the common man is allayed and the overall personal taxation system for individual taxpayers is made more sparing. This would indirectly help the government widen the tax collection net by paving the way for increased voluntary compliance in the country," Jhunjhunwala said.
Deloitte India Partner Rohinton Sidhwa said there is an expectation that at the G-20, India will push the agenda on areas that will yield more tax revenue for developing countries.
"The unfinished agenda on taxing the digital activities of global MNCs is high on the priority list. Also, India is expected to spearhead quick headway on better reporting for crypto transactions. The crypto industry globally has attracted much attention, and there is a spur to regulate the industry better, prevent misuse through money laundering, and capture any tax leakages."
Shardul Amarchand Mangaldas and Co-Partner Amit Singhania said it is expected that the government will rationalise prosecution provisions under the Income-tax Act, 1961. The current monetary threshold to invoke criminal prosecution is as low as Rs 10,000 and may require rationalization.
The Year That Was
On the Goods and Services Tax (GST) side, the GST Council, comprising finance ministers from states and the Centre, has set the ball rolling on rationalisation of tax rates and the merging of slabs as the indirect tax regime completes its fifth year.
The end of the GST regime after half a decade was significant because the compensation paid to states for revenue loss ended this year, as did the term of the National Anti-Profiteering Authority, whose job was transferred to anti-monopoly watchdog the Competition Commission of India.
GST collections, which are a barometer of the economy's performance, have been showing improving signs and are stabilising around Rs 1.4 lakh crore on the back of a vibrant economy.
As the government stepped up compliance checks and data sharing among departments, the tax revenues have improved over the year, and this fiscal is likely to exceed the budget target of Rs 27.50 lakh crore by about Rs 4 lakh crore, helping the government to keep its fiscal deficit in 2022–23 within the budgeted level.
Keeping a hawk's eye on the areas that can garner more taxes, the government this year brought in a 30% tax on transactions in virtual digital assets, or cryptocurrencies. Also, to establish the money trail, a 1% tax deducted at source, or TDS, has been brought in. This tax has somewhat dampened investor sentiment in highly risky crypto investments.
Also, the 'windfall profit tax' was introduced to tax 'above-average profits' earned by the domestic oil and gas companies after crude prices skyrocketed following the Russia-Ukraine war. To tax the above-normal profits earned by upstream oil companies, India imposed a windfall tax on oil producers in July 2022 and reviews it every fortnight.
Besides, the concept of an updated return has been introduced this year to enable taxpayers to disclose omitted income and correct mistakes made in income tax returns within a two-year window. An additional 25% on the due tax and interest would have to be paid if the updated ITR is filed within 12 months, while the rate will go up to 50% if it is filed after 12 months but before 24 months from the end of the relevant Assessment Year.
What to Expect
KPMG's India Partner in Indirect Tax, Abhishek Jain, said the forthcoming year will be an exciting one for indirect taxes with the much-awaited new Foreign Trade Policy and the DESH bill expected to be launched. These new legislations will significantly impact the Indian import-export market.
"As regards the GST regime, it is expected to see the long overdue establishment of the GST Appellate Tribunal along with rate rationalisation or merger to reach revenue-neutral collections. Additionally, with departmental audits and assessments picking up under GST and a few grey areas such as crypto, casino, and online gaming taxation requiring clarification, there is much to look forward to,” Jain said.
AMRG and Associates Senior Partner, Rajat Mohan, said the effective personal taxes may also go down as a populist measure. This will boost disposable income and recuperate the demand cycle. Next year's budget would have to address critical macroeconomic issues like inflation, demand, and unemployment to fuel economic growth in the coming years, Mohan added.