The Budget 2017 tried to accommodate several antidotes for demonetisation, and, set the tone for the economy for the future. Benefits and investments were expected as a logical pacification to the chaos and uncertainty that prevailed in the country lately. To that extent, the announcements regarding education, digital payments, investments, transportation, defence, healthcare, food, industry and labour have been made, like is the norm in every budget. But the realisation of these announcements is a time-bound and segmented process, which is likely to benefit more in the long-term.
However, budget announcements regarding taxation, service charges, value-addition, revenues, rebates etc. to be implemented from the coming financial year will have a direct, tangible and measurable change in how much you pay in taxes and surcharges. Therefore, it is not enough to merely know that the tax slabs for personal incomes have changed, but it is important to know how they have changed as well, and more importantly, why. Let’s take a look at what is going to impact salaried employees:
Income Taxation rates revised:
Individuals who earn up to Rs. 3 lakh annually will now have zero tax liability (as opposed to Rs. 2.5 lakh earlier). Furthermore, those earning between Rs. 3 lakh and Rs. 5 lakh will be taxed at a rate of 5% (as opposed to 10% earlier).
In effect this means that all individuals earning below Rs. 5 lakh will have their tax liability halved immediately, or even lesser, if benefits are claimed. However, the benefits of rebate will now be available to fewer individuals, as the existing benefit is being reduced to Rs. 2500 (from Rs. 5000), available only to individuals with an income of up to Rs. 3.5 lakh. In other words, individuals earning between Rs. 3.5 lakh and Rs. 5 lakh will receive no rebate, in effect, incurring a benefit of Rs. 5000 less than they could have (had the government not withdrawn the Rs. 5000 rebate benefit). However, as pointed out by the minister himself in his speech, individuals can avail the tax deduction benefit of Rs. 1.5 lakh (by investing under Section 80C in PPF), mutual funds and insurance products, and, in effect, have zero tax liability for an income up to Rs. 4.5 lakh.
Furthermore, all other individuals in the subsequent tax slabs (up to Rs. 50 lakh) will get a benefit of Rs. 12,500. In order to offset the loss in revenues incurred by making these changes, a surcharge of 10% of tax payable on individuals with incomes between Rs. 50 lakh and Rs. 1 crore has been proposed. Surcharge on incomes of Rs. 1 crore or more has been left unchanged. However, the net loss is expected to the government will be to the tune of Rs. 20,000 crores in revenues.
This revision of taxation rates was very well in the making, as by the Finance Minsiter’s own admission, India’s tax-to-GDP ratio is one of the lowest in the world, where a majority evades taxes, as a result of which, a small minority of individuals bear the tax burden. Just to put things in perspective, of the 1% of Indian citizens who actually filed tax returns last year, a third reported income levels below Rs. 2.5 lakh i.e., zero tax liability. 24 lakh individuals reported an income of over Rs. 10 lakh, and of the 76 lakh who reported an income of over Rs. 5 lakh, 56 lakh were salaried employees. Hence, nominal taxation rates were needed at lower slabs, for people to voluntarily pay the lesser amount, in addition to reducing the burden from the salaried class, explained the Finance Minister. Additionally, further simplifying the procedure to pay taxes, a one page tax filling form is proposed for individuals with taxable incomes below Rs. 5 lakh. You can see how much tax you will save or pay more here, depending on your income category.
New benefits to National Pension Scheme (NPS) subscribers:
In last year’s Budget, the government had offered an additional tax benefit in NPS under a different section for the first time. NPS offers tax saving at the time of investment and accumulation, but the withdrawal is taxable (expect for the tax-exempt portion), which means, that NPS defers the tax you have to pay today. Last year as well, to encourage individuals to opt for NPS, the maturity corpus was made partially tax-free by giving tax-exempt status to 40% of the total amount payable. This year it has been proposed to provide exemption to partial withdrawal not exceeding 25% of the contribution made by an employee. Simply put, a new clause in the Income Tax Act, 1961, will provide exemption on partial withdrawal not exceeding 25% of the contributions.
Furthermore, aiming for parity between salaried employees and self-employed individuals, contribution up to 20% of the gross income of the self-employed individuals will be deductible from income tax (as opposed to 10% previously).
MSMEs tax reduced by 5% (turnover of up to Rs 50 crore)
Additionally, a cut of 5% in the tax rate - from 30% to 25% - for companies with an annual turnover of up to Rs. 50 crores is expected to benefit the MSME sector, and encourage voluntary tax compliance. It could even contribute towards the sector expanding and growing, hiring more, and offering competitive remunerations. This step is very opportune, as the MSMEs have been the worst hit by demonetisation, and the Finance Minister claims that this reduction will benefit 96% of the MSME taxpayers. This along with a change in the tax audit threshold limit, a longer carry forward of minimum alternate tax credit, and an extended window for start-ups to claim a three-years tax holiday, are steps that are likely to give a much-needed boost to the backbone of the economy – that also happens to employ a large number of people.
Despite being marred in political controversy, Budget 2017 has toed a careful line of being guarded and cautious, as a result of which, it has come under criticism from varied sectors, most notably being middle-income individuals, earning between Rs. 5 lakh to Rs. 15 lakh – who were expecting a bigger relief. While progressive taxation is about higher taxes for the rich, and giving more benefits to those at the bottom of the pyramid, the government might not have done enough for those in the middle. Furthermore, lack of focus on reigniting investment, agrarian reforms, and immunity from global developments has also been voiced as serious shortcoming of the proposal.