The new income tax regime, announced in the Union Budget for 2020-21 on Saturday, would offer to a certain strata of society, which are not in a condition to invest enough to claim deductions and exemptions, a more equitable system of direct taxation, Revenue Secretary Ajay Bhushan Pandey said in an interview. Speaking to AANCHAL MAGAZINE and PRANAV MUKUL, Pandey said a progressive and graded income-tax system is internationally considered to be one of the best practices, and differs from the indirect tax system, where the aim is to lower the number of tax slabs to reduce complexities. Edited excerpts:
The new income tax regime is being seen as a nudge by the government to spend. Are you disincentivising savings?
Not necessarily. Say, if I want to save, I will opt for the other option. So actually it is providing relief to those who — because of family circumstances or life situations — are not availing those exemptions, or they are not in a position to avail those exemptions. If the earlier system was inequitable to that section of taxpayers, then why should they suffer?
Therefore, we have provided relief. I’ll give you an example: if you look around, for someone who has just joined the workforce, he is living as a paying guest, he’s just started a job, he doesn’t know where he will live, whether he will buy a house, so he has no housing loan. He’s not taking any other benefits He’s contributing a certain amount in the EPF. So, to that extent, he will take the benefit, he will take some nominal health insurance. Such a person will find this new scheme attractive. So, we are not saying that all those who are claiming exemptions will opt for the new regime, because there is a catch depending on one’s income level.
But you have a road map of doing away with the exemptions.
The Finance Minister has said that we have removed around 70 of the exemptions in the new simplified regime. We will review or rationalise the remaining exemptions and deductions in the coming years with a view to further simplify the tax system and lowering the tax rate.
So she’s talking about the simplified system. The other system will continue. As of today, if we had to remove exemptions, we could have removed it from the older regime.
But there will be a gradual removal …
Yes, in this system.
But there’s no plan to remove exemptions in the old regime?
As of today, there is no plan. We have provided this new option and if, say, 90 per cent of people shift to the new system, then what is to be done with the 10 per cent? We will see at that time. Why should we indulge in speculation today?
Since March 31 is the deadline for the first window under the Vivad Se Vishwas scheme, is there any estimate for this fiscal and in the Budget?
There are two purposes for this scheme. One purpose is to reduce litigation and provide relief to as many people as possible. In the process, you will obviously get revenue but we are more driven by how many people are given relief than actually getting into how much money we will get.
What will be the penalty under the scheme after March 31?
There is a penalty of 10 per cent. So if earlier the tax was Rs 1 crore, (someone coming after March 31) will pay Rs 1.10 crore. Similarly, if it was only interest and penalty, we have said that you should pay 5 per cent on that. So if it was 25 per cent, he will pay 30 per cent.
The Budget mentions transfer of GST balances to compensation fund. Where was the balance till now?
In 2017-18, certain money for compensation was collected but our compensation requirement was less. So that money, at that time, went to Consolidated Fund of India. So, now the money has to be taken out of the Consolidated Fund of India and put into the Compensation Fund. The balance in 2017-18 and 2018-19 was approximately Rs 35,000 crore.
There is concern that income from dividends being taxed could lead to a section of companies not giving dividends at all …
There used to be a demand from the industry for removal of dividend distribution tax and a switch to the classical system. Now that we have switched to the classical system, they are saying these things. The dividends are distributed on the basis of a company’s needs for investment. If the company feels that the money needs to be reinvested, dividends will not be given. Dividends are not given on the basis of the taxation principle. Once the company has decided the dividend amount, it will have to be distributed and whoever receives it will pay at the applicable rate.
In GST, focus is on simplifying by moving towards lesser number of slabs. But in income tax, on the contrary, the number of slabs have been increased …
In GST, having multiple slabs is different from having multiple slabs in income tax. I have a list of countries, which have six to seven slabs. The slabs are dependent on income distribution. If you have a flat tax rate, it becomes inequitable in the way that you are taxing the rich and poor … Having a few tax slabs also becomes inequitable because there is a sudden jump … and there will be a tendency to understate income to get to a lower slab. Therefore, a progressive taxation system in income tax is internationally considered to be one of the best practices. In the US, there are six slabs of income, and in China, there are seven slabs of income. We have studied practices of Malaysia, Thailand, Indonesia, Vietnam and several countries.
If you have more income range, you need as many slabs as possible to prevent people from getting a shock when they move from one slab to another. In GST, multiple slabs create a problem because the same input is going into manufacture of five different goods, which are being taxed at different rates. However, if the level of income inequality is high in a society, it is much more simple and desirable to have multiple and graded income tax-structure.