A day after the Union Budget proposed a new income-tax regime, revenue secretary Ajay Bhushan Pandey said on Sunday that there will be no losers in the new system and that it will benefit the lower and the lower-middle income segment the most. The purpose of the proposal is to offer an option of a simplified system, particularly to those who are not availing many exemptions, he said in an interview with Shishir Gupta and Rajeev Jayaswal. Edited excerpts:
Is it true that someone who currently opts for all possible exemptions on tax savings will end up paying more taxes in the new system for lower income-tax rates without exemptions?
The actual position is that in this proposal not a single person will be a loser. If anyone is the loser, he will be under the older scheme. There is absolutely no doubt about it...the basic purpose of this whole proposal is to offer an option of a simplified system, particularly to those who are not availing many exemptions. For example, a fresh salary earner — somebody who has just joined the workforce and started earning salaries — is not in a position to take the advantage of housing loan interest, because he has not yet decided where he will build the house or [if] he will buy a house.
He may also not be in a situation to purchase a medical insurance policy because his employer may be providing the insurance. He may not have yet decided which pension scheme he will opt for. His salary package may not be such that he may be taking a good part of the HRA [house rent allowance] component in the salary as he may be taking a consolidated salary. So the class of such salary earners are better off with the flat tax rate without seeking exemptions. Similarly, if a person is engaged in an MSME [micro, small and medium enterprises], he doesn’t get LTA [leave travel allowance], he doesn’t get HRA;he might be better off without taking exemptions. Also, let’s take a person who is above 50 years of age...he may not be able to avail interest on the housing loan as he may have already paid off housing loans. He may also not be interested in increasing his income by investing into various savings instruments. He will also be benefited by this new system. So the idea was to provide lower tax rate to those who, because of their financial circumstances, were either not availing the deductions or were not in a position to avail these deductions. Earlier such people were at a disadvantage.
{{/usCountry}}He may also not be in a situation to purchase a medical insurance policy because his employer may be providing the insurance. He may not have yet decided which pension scheme he will opt for. His salary package may not be such that he may be taking a good part of the HRA [house rent allowance] component in the salary as he may be taking a consolidated salary. So the class of such salary earners are better off with the flat tax rate without seeking exemptions. Similarly, if a person is engaged in an MSME [micro, small and medium enterprises], he doesn’t get LTA [leave travel allowance], he doesn’t get HRA;he might be better off without taking exemptions. Also, let’s take a person who is above 50 years of age...he may not be able to avail interest on the housing loan as he may have already paid off housing loans. He may also not be interested in increasing his income by investing into various savings instruments. He will also be benefited by this new system. So the idea was to provide lower tax rate to those who, because of their financial circumstances, were either not availing the deductions or were not in a position to avail these deductions. Earlier such people were at a disadvantage.
{{/usCountry}}But no exemptions will discourage people from investing.
Who said that they will not get exemptions? The finance minister had clarified that both streams are available. So either you take all the exemptions and continue to pay tax at old rates or you don’t take exemptions and pay at lower rates. If you also read the finance minister’s statement, she said she reviewed all exemptions and 70 have been removed. About the remaining also, she has said, the exercise [of pruning] will be conducted. And as and when we remove those exemptions from the new system, the tax rates will be further brought down.
Read her speech, page 34. She said: “I have removed around 70 of them in the new simplified regime. We will review and rationalise the remaining exemptions and deductions in the coming years with a view to further simplifying the tax system and lowering the tax rate.” So she is talking about the new system. If there is any confusion that exemptions will be withdrawn from the old system, that is incorrect.
Tax exemptions have been nudging people to save. With the new option (lower tax without exemptions), do you think that domestic savings will take a hit? Especially when India does not have any robust social security system?
You see, this is our assumption. Everyone has a different financial situation. Everyone is the best judge of his interests. And, therefore, we should trust that the person will be able to take an informed decision on whether he should invest or he should take deductions. One could make investments in those savings instruments and yet be gainer in the new system. Now the nudging doesn’t happen only through taxation system...Because each exemption or deduction provides scope for interpretation and brings in subjectivity and discretion, therefore, complaints. For example, somebody has claimed HRA, then the question comes: where is the rent receipt [or] whether the rent receipt is genuine or bogus. Somebody has claimed for medical treatment, then question arises: whether that treatment has actually happened or not? Whether the disease qualify for that kind of tax benefit or not?
So while introducing a transparent system, we have not removed the earlier system. If people find the new option attractive, they will come. Otherwise they will not come.
How many taxpayers would switch over to the new system?
...we will have to wait and see. We have to wait for a few quarters. We do not know in what manner salaries would be restructured, both from the employer’s side as well the employee side. But what we have estimated is the revenue forgone [ ₹40,000 crore]. We expected 50% of people in various categories, particularly in the lower bracket and the middle class taxpayers, will find it more convenient to switch over to the new system.
Will there be a rethink on at least standard deduction?
There is no withdrawal, therefore no rethinking. People can take standard deduction by remaining in the old system.
Domestic investors are unhappy. They have to pay tax on dividend income while FIIs (foreign institutional investors) do not.
Domestic investors, particularly in the lower income group, should be happy, because in the earlier system, the DDT [Dividend Distribution Tax] was taxed at around 20%, 25% and 30% depending upon whether it is an equity or debt instrument. If a person who was earning less than ₹ 5 lakh, now if he gets dividend, he does not have to pay any tax on it. Whereas in the earlier system, 20%, 25% or 30% tax was deducted.