The Union Budget 2022 is being presented at a very crucial juncture for the Indian economy and taxpayers. Covid 19 has resulted in loss of employment or erosion of income for several personal taxpayers, increased medical expenses and financial insecurity. Further, the fiscal stimulation measures and higher fiscal deficit have resulted in higher inflation.
The Union Budget 2022 is expected to focus on employment generation, increase in limits for basic tax exemption, standard deduction, medical expenses, rationalisation of tax rates and certain social security investments. Higher economic growth (expected to be 8% for FY 2022-23), clear rules for taxation of crypto assets and a more efficient tax administration is expected to result in higher tax revenue collection. Some of the changes expected on the personal taxation front are as under.
1. Rationalisation of tax slabs
At present, there are 10 income tax slabs rates ranging from 5.2%, 10.4%, 15.6%, 20.80%, 26%, 31.2%, 34.32%, 35.88%, 39% and 42.744% in case we consider the effective tax rates including surcharge and cess and the concessional tax regime. It is also important that the highest tax rate is reasonable for greater compliance. It would be advisable to simplify and rationalise the tax slabs to 5%, 10%, 15%, 20%, 25%, 30% and 35%.
2. Increase of basic exemption limit from Rs 2.5 lakh to Rs 3 lakh
Currently, the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act) provides for a basic exemption limit of Rs 2.5 lakh which has remained unchanged for several years. Given the current annual inflation rate of about 5%, higher cost of living and the time which has elapsed since the last revision, it is expected that the basic exemption limit should be increased to Rs 3 lakh. Consequently, the maximum tax rebate under section 87A of the Act, which is currently Rs 12,500, may be restricted to Rs 10,000.
3. Tax deduction for Covid Bonds
There is a huge fiscal deficit and at the same time, need for higher government spending due to the continuing impact of the third wave of Covid, need for economic revival and expenditure on infrastructure. The government needs to raise additional resources. The government should endeavor to raise funds through Covid bonds with a nominal interest rate and with a tenure of 3 to 5 years. The investment in Covid bonds can be eligible for tax deduction without any limit. This can revive economic growth and reduce the government outflow on interest and at the same time, result in substantial additional income disclosures by taxpayers.
4. Introduction of “Work from Home” allowance
Due to the current pandemic situation, many organisations have adopted a work from home model or resorted to remote working for the past year or even in many cases, hybrid work model has been adopted. As a result of the same, such salaried individuals are required to ensure that they have an appropriate office set up such as internet/wifi connection, laptop, printer, office desk, chair, etc. Thus, the provisions of the IT Act should accordingly provide for exemption from taxation of such allowances and/or facilities received. Alternatively, the government may provide for a specific amount (say Rs 3,000 per month) for the purpose of exemption under Rule 2BB of the IT Rules.
5. Introduction or clarity on taxation of cryptocurrency transactions
The entire crypto industry has been awaiting the passing of the Crypto Currency Bill by the Parliament. As per estimate, India has now about 20 million investors with an investment estimated at $10 billion. With such huge investment at stake, the government needs to provide for taxability of gains arising from crypto investment. With no specific provisions for cryptocurrency, there are various ambiguities with regard to taxability of such gains derived from the same. For instance, whether the gains would be treated as in the nature of capital gains or Income from Other Sources or Income from Business. Further, there is no clarity on the applicable tax rates or even the methodology of classification of crypto assets into long term or short term, taxation of mined cryptos, disclosure requirements, etc. There is also no clarity on the applicability of GST on such transactions. Thus, in order to remove such ambiguities and avoid litigation in future, there is a need for specific provisions for taxation of crypto transactions. This would also result in additional revenue as taxpayers can report such transactions without fear of additional tax exposure.
(The author is Founder – RSM India.)