Major tax reforms such as the Goods and Services Tax may be hanging fire on account of legislative hurdles, but the Centre seems to course to implement a series of incremental tax reforms aimed to benefit small taxpayers and businesses. The first draft of Justice RV Easwar-led committee’s report on simplifying the Income-Tax Act, which was made public last week, has made many suggestions to simplify the taxation process for the common taxpayer and some of these recommendations are likely to be taken up for consideration as part of the proposals for the upcoming budget.
The Easwar committee has suggested amendments for raising the threshold for the tax deducted at source (TDS), halving the TDS rate to 5 per cent and eliminating tax officer’s discretion with regard to treatment of capital gains on shares’ trading. “The Justice Easwar committee’s report is not only aimed to simplify tax regime, but also to address issues which are open to interpretation and hence, reduce litigation,” Vikas Vasal, partner and head, tax markets, KPMG said.
The committee, which has made 27 suggestions for amendments under the Income-tax Act and 8 recommendations for reform through administrative instructions, has also suggested halving of the withholding tax in most cases along with changes in interest to be paid on delayed tax refunds that will benefit all taxpayers. With the finance minister Arun Jaitley stating that the government is looking into recommendations of Parthasarthi Shome Committee and Easwar panel report, tax reforms seem to be high on the agenda of the government for the upcoming Budget for 2016-17.
What do the recommendations hold for a small taxpayer?
Among the most important recommendations that will have a significant impact for a small taxpayer is the increase in the threshold limits and reduction of the rates of TDS. With nearly 65 per cent of the personal income-tax collection in India being raised through TDS, the committee’s proposals for TDS provisions are aimed to make it more tax friendly.
The committee has suggested reduction in TDS rates in case of interest and commission for individuals and Hindu Undivided Families (HUFs) to 5 per cent from 10 per cent at present.
“The Easwar committee addresses the day-to-day difficulties for a normal taxpayer. Whether it’s filing of returns or change in limits for TDS or higher interest on delayed refunds for taxpayers, the committee has tried to address small issues for the normal taxpayer,” Vishal Shah, partner, tax, PwC said.
The threshold limits for TDS, which have not been changed for years and remain low, are also set for a revamp if the government will accept the recommendations of the committee. The committee in its recommendations has suggested increasing annual limit for TDS liability on payment of bank interest to Rs 15,000 from Rs 10,000 at present. The annual limits for TDS liability for payment of interest on securities and on interest on NSS accounts is proposed to be raised to Rs 15,000 from Rs 2,500 currently, while that for rent income is suggested to be hiked to Rs 2,40,000 from Rs 1,80,000.
Winnings from lotteries and horse races will be clubbed under ‘income from winnings’ and are proposed to be taxed under 30 per cent.
Interest on delayed tax refunds, relief for capital gains
Experts say the proposal to hold the tax administration accountable for delay in processing of returns beyond a reasonable period is a welcome move to remove the discretionary powers in the hands of tax officials, who would otherwise have no incentive to pay higher interest rate for delayed refunds. The committee has proposed a 12 per cent interest on tax refunds made more than six months after the returns are filed, while an interest of 18 per cent should be paid for refunds with delay of over a year. At present, the interest on refunds cannot exceed 6 per cent or half a percent a month.
“The committee has proposed to rationalize the tax refund process. Even though the government has made efforts for time-bound refunds in the past, still there are areas that need to be ironed out. The committee has recommended increase in interest rate on refunds to one per cent per month and has also proposed to further increase it to one and half per cent per month in case of excessive delay,” Vasal said.
The committee has recommended clearance of refunds within three months from the end of the month in which the order is passed, or else payment of additional interest on delayed refund at 0.5 per cent per annum. The panel’s suggestion to move towards electronic tax processes to minimise human interface will empower the common taxpayer to follow his or her tax processes in a simple and convenient manner, tax experts said. The committee has suggested that processes such as filing of tax returns, rectification of mistakes, appeal, refunds and all communication for notices, questions and documents sought should be done electronically. “The suggestion to bring in most of the tax processes online will help reduce the time and effort involved for small taxpayers. The move will bring in more tax transparency,” Vasal said.
To help small businesses and sole proprietorships, the committee has recommended changes in the presumptive scheme, wherein turnover threshold for mandatory audit of the books has been proposed to raise from Rs 1 crore to Rs 2 crore for businesses and Rs 25 lakh to Rs 1 crore for professionals. Under the presumptive income scheme, it is proposed that businesses will not be required to maintain a book of accounts. The presumptive tax is levied on presumptive income calculations.
The committee has recommended launching a presumptive scheme for professionals, having proposed that 33.3 per cent of their previous year’s receipts will be taken as income on which they will have to pay tax. If their profits are lower, they will have to maintain a book of accounts categorising expenditure separately and pay tax accordingly. For small taxpayers, who are not declaring income as per the presumptive income scheme and find it difficult to maintain accounts, the committee has recommended that a de minimus provision should be made for exempting them from the mandatory requirement of maintaining books of accounts and getting them audited.
“The proposals for small and medium enterprises under the presumptive scheme wherein it is suggested to enhance in limits for audits to Rs. 2 crore from Rs. 1 crore along with proposal to launch a similar scheme for professionals will help in ease of doing business,” Shah said.
In a recommendation which is expected to increase retail participation in stock markets, the committee has also proposed that stock trading gains of up to Rs. 5,00,000 should be treated as capital gains and not business income, provided the shares were not held as stock-in-trade. The committee has accordingly recommended taxing the gains at 15 per cent for listed companies, though the gains will be taxed as long-term capital gains if held for more than one year and shown as capital assets. “The debate, however, will still remain open for large taxpayers whose stock trading gains will be more than Rs 5,00,000 and the tax liability will be decided as per the old principles and thus, will be subject to discretion,” Shah said.