ET Bureau





ET Bureau



ET Bureau



ET Bureau



ET Bureau





ET Bureau



ET Bureau



ET Bureau





ET Bureau



ET Bureau



ET Bureau



ET Bureau



ET Bureau



ET Bureau



ET Bureau



ET Bureau





ET Bureau





ET Bureau



ET Bureau



ET Bureau



ET Bureau

ET Bureau



ET Bureau



ET Bureau





ET Bureau

Will the Budget bring down taxes? This is probably the most-asked question in the weeks before the Finance Bill is tabled in Parliament. But though we are a nation obsessed with tax, the startling fact is that only 3% (4.1 crore Indians) of the total population filed income tax returns in 2014-15. Only 1.6% actually paid income tax. One out of two Indians who filed a return declared zero taxable income.Even so, the budget proposals relating to tax slabs, deductions and exemptions are very closely watched by Indians, almost as if the Budget is only about personal taxation . In the previous Budget, nearly everybody had expected that the finance minister will offer significant tax relief to the middle class to act as a balm after the searing pain of demonetisation. However, though the Budget did reduce the average taxpayer’s tax burden, it also took away some benefits. The cap on the deduction of home loan interest was a major shock for those with houses put out on rent.This year, the expectations of a taxpayerfriendly budget are even higher, given that five states have assembly elections in 2018 and another three in 2019. Many economists fear that the government will roll out a populist Budget.As the Finance Minister and his team sit down to frame the Budget, ET Wealth has a few suggestions. We have short-listed 25 measures that experts from the financial services industry would like to see in the Finance Bill, 2018.Admittedly, some of these measures, like a longer tenure for education loan deduction, a separate deduction limit for pure protection term plans or making NPS investments tax free, will have an impact on revenue collections. The government, already under pressure to rein in the fiscal deficit, may not be able to introduce all such measures. But most of the other steps will not have any significant impact on revenue collections. They will only make life easier for common taxpayers, investors and consumers.Under Section 80E, the interest paid on an education loan from a qualified lender can be claimed as a tax deduction. But this benefit is available only for a maximum of eight financial years. When this deduction was introduced in 2006, a four-year engineering course cost around Rs 3-4 lakh and a medical degree cost around Rs 5-6 lakh. The cost of higher education has risen quite sharply since. Today, an engineering course costs Rs 8-9 lakh and a medical degree roughly Rs 12-14 lakh. The prevailing interest rates for education loans range from 10.5% to 13.5%. Assuming a rate of 11.5%, the EMI for a loan of Rs 25 lakh for eight years will come to around Rs 40,000. The average borrower may have to extend the loan well beyond eight years. So the window for tax deduction should also be widened. Just like a home loan, it should be available for the full tenure of the loan. This would encourage young Indians to seek top-grade education and build a strong foundation of human capital.Under Section 80CCD (1), there is a cap on the tax deduction that self-employed taxpayers can claim on contributions to the NPS. The 2017 Budget had increased this cap from 10% to 20% of gross income, to bring in parity between salaried and self-employed taxpayers. However, for self-employed taxpayers this comes under the overall deduction limit of Rs 1.5 lakh under Section 80CCE. On the other hand, an employee can claim deduction for up to 10% of his income under Section 80CCD(1) within the overall limit, and a further deduction of employer’s contribution of up to 10% of salary under 80CCD(2), without any overall limit. To bridge this gap, the overall limit for self-employed taxpayers should be raised to match the benefits available to salaried employees. The government should consider raising the limit under Section 80CCE to say Rs 5 lakh or 20% of the gross income. This will encourage self-employed taxpayers to invest more in NPS.The dividend distribution tax (DDT) discourages companies from paying dividends, which dampens investor confidence. The DDT should be removed to improve investor sentiment. There is also a need to amend Section 14A, Rule 8(d), which seeks dis-allowance of expenses. Inclusion of divided in ‘exempted’ income is misleading and untrue because dividends are already taxed under DDT.The Finance Minister indicated that there are plans to reduce corporate tax rates this year, as in previous budgets. He should also consider reducing the individual tax rates or increasing slab limits. While others are paying tax after the deduction of expenses, the salaried class is obligated to pay tax at the gross level. This is an unfair arrangement. The best way to resolve this is to bring back ‘standard deduction’. A flat standard deduction percentage can be fixed for the salaried class, thereby restoring equity between them and other taxpayers.Some entities, mostly stock brokers, are demanding a repeal of the securities transaction tax (STT) and simultaneous withdrawal of tax free status of long-term capital gains from equities. While a reduction in STT is welcome, there is no need to link it with the tax-free status of long-term capital gains. If this facility is withdrawn, it will deal a blow to the appeal of equities, which has started gaining traction. Since the risk capital is a basic necessity for economic development, withdrawing this benefit can also impact economic growth, and in turn, overall tax collection. In fact, tax loss from this move may be higher than that of the tax forgo happening due to tax-free long term capital gains.The tax laws need to be changed to allow donation and gifting of securities, such as listed stocks and mutual funds, without tax implications. The value of the gift or donation could be calculated as the fair market value of the securities on the date of actual transfer. This would give the donor or gift giver two benefits: exemption from capital gains tax on the securities; and tax-deduction on the amount from their income. Right now, the process of gifting or donating an amount invested in securities involves liquidating them and transferring the cash amount. The process leads to the investor incurring capital gains tax. Changing this would not only promote the practice of gifting investments, but also allow people to donate to worthy charities without worrying about taxability.The goods and services tax (GST) has simplified the cascading tax structure and reduced tax rates for a host of products and services, thereby reducing the burden on end consumers. However, the tax bracket on financial services has been hiked from the initial 15% to 18%. This has made life insurance products costlier, especially pure protection and endowment plans. India has one of the highest protection gaps in Asia, with an abysmally low life insurance penetration of 3-4%. In the absence of a comprehensive social security mechanism, insurance provides the first layer of financial security to an individual or family. It is, therefore, imperative to exempt insurance products or subject them to 5% GST. Ideally, pure protection life insurance and health insurance should be considered as “essential” services and completely exempt from tax. Real estate investment trusts (REITs) can increase the depth of the real estate market by offering a new asset class for investors as well as provide a credible exit route for existing investors and developers. They have the potential to enhance the supply of commercial real estate—an enabler for the employment ecosystem. But though REITs have received regulatory approval, this potent instrument of change in the real estate industry has been held back. Despite being like debt instruments which offer close to stated returns, REITs carry an inherent element of risk which makes them similar to equity investments. The risk profile of REITs is somewhere between those of debt instruments and equity. The budget needs to cut down the long term capital gains holding period for REITs from three years to one year. This would bring the investment opportunity at par with equity investments and would make REITs more palatable to investors.There has been a marked increase in the incidence of communicable and lifestyle diseases in India, driven by unhealthy eating habits and lifestyles. To make matters worse, there has been a steady rise in medical inflation, which is currently growing at 18-20% per annum. So, the medical expenses of the average household can easily exceed the medical allowance limit of `15,000 per year. Health insurance policies normally don’t cover expenses like consultation fees, medicines and diagnostics, and individuals have to shell the extra amount out of their own pocket. Companies usually cap the medical allowance at the tax free limit of Rs 15,000. If this limit is revised upwards, companies will also be encouraged to hike the allowance.The memory of the Mumbai floods is still fresh in the minds of the city’s residents. While the trauma was unavoidable, a home insurance policy could have saved many from financial stress. To make home insurance pervasive, there needs to be a concerted effort from all stakeholders including the government. The government should make home insurance compulsory and incentivise home buyers by providing income tax benefit for the premium paid towards a policy. This will not only ensure protection against financial loss for customers, but will also aid in deepening insurance penetration in the country.Instead of compelling investors to keep track of multiple schemes and sections to make the most of the existing exemptions under 80C, the government should introduce a separate Individual Retirement Account (IRA). It should allow a certain percentage of income to be tax free as long as it is allocated to the IRA and not withdrawn for a lock-in period of 20-30 years. The investor should be free to choose any asset class to invest in and reallocate at will.Many investors invest in FDs to reap taxation benefits under Section 80C. But due to the falling interest rates, they are looking for options that promise better returns, relatively lower risk and the same tax advantage. For conservative or first time investors, the best alternative is hybrid funds. Hybrid funds are designed to generate good returns through investment in equities, while protecting the downside and smoothening volatility through investment in debt. For low-risk investors, hybrid funds offer higher returns compared to traditional options and are less volatile than equity oriented funds. Hence, the 80C tax exemption benefit should be extended to this category, with a lock in of 3 years like ELSS.To encourage retail investors to invest in debt funds and to standardise the holding period across various asset classes, the minimum holding period for long-term capital gains should be reduced from 36 months to 12 months. This will bring debt funds on par with equity schemes and other instruments like listed corporate bonds. The LTCG may be retained at 20% with indexation benefit, but the tax rate for long-term investments of over 10 years in debt oriented schemes should be reduced to 10%. This would encourage investors to remain invested for longer periods and build their corpus.Employee Stock Option Plans (ESOP) become taxable as a perquisite on the allotment or transfer of shares. However, with growing complexities in plan designs, such shares may be subject to a further lock-in period after they have been allotted or transferred. This tax incidence should be postponed until the lock-in period expires. The previous Budget had proposed that specified tax exemption would not apply to the sale of equity shares purchased after 1 October, 2004, without the payment of STT. Subsequent notifications provided some relaxation for ESOPs and Employee Stock Purchase schemes, but, it is not clear if this exemption is available for shares of unlisted companies, which are subsequently listed. The Budget should clear the air on this issue.Taxpayers already use online portals for tax filings, wherein personal and tax paid information are pre-populated in the tax form. The government can take this a step further by sending pre-populated tax forms to taxpayers with information from their Form 26AS and other financial transactions linked to their Aadhaar and PAN. The taxpayer should have the option of reviewing and modifying the information before filing. This automatically generated tax return should be considered final unless the taxpayer modifies it before the due date. There will be a small number of people who will need to modify their information further to report Indian or foreign assets and claim of double taxation relief. While the process might involve implementation challenges, over the long term, it will ease the burden of compliance and therefore bring down tax rates for all taxpayers.The government has already taken several steps to make housing affordable. However, affordability is still an issue in India due to high real estate prices. Some restrictive policy actions in the Budget can help rationalise property prices. Though demand is low, prices are still high because builders and high net worth investors refuse to divest of their inventory. The Budget should introduce a 10% tax on holding on to inventory after all aspects of building construction are complete , and the occupation certificate has been obtained. This will compel builders to reduce inventory in finished projects and the increased supply will bring the prices down. However, the impact of this move will last only as long as the existing inventory does.Gold has been assigned a special GST slab of 3%. However, the high customs duty of 10% promotes an active grey market in the metal. For broader financial reforms to succeed, and in order to lift gold’s economic contribution, the metal must be brought into the mainstream. To this end, overall tax on gold needs to be rationalised with a substantial reduction in customs duty.At present, investors can avail of tax benefits subject to different lock in periods, based on the nature of underlying investments. For instance, ELSS have a lock in of three years, whereas the tenure for availing of long term capital gains tax benefit is one year for equity investments, and three years for debt investments. For bank FDs it is five years and different for EPF and PPF investments. Aligning the tax benefits based on longevity of investments, rather than on the underlying asset class, would better enable investors to decide their risk appetite without any tax biases in mind.According to an RBI report, only a small number of Indians above 65 years of age have saved in private pension plans and a large segment of the total population has not taken any steps to ensure adequate financial coverage during retirement. One major reason for this is the taxability of pension plans. Right now, if an investor does not buy an annuity on maturity, 66% of the corpus is taxed. Even the pension from the annuity is treated as income and taxed accordingly. Both these tax rules should be relaxed to encourage people to invest in pension plans.At present, there is a significant amount of overcrowding in the Section 80C basket. In order to remedy this, the insurance industry has repeatedly sought a separate tax deduction limit for life insurance plans. If this is not possible, a separate deduction should be offered for pure protection term plans. In India, tax benefits often drive financial decisions. Therefore, a separate limit is likely to encourage a lot of taxpayers to buy term insurance.The GST rate for real estate is 12% of the sales consideration. Before GST, the service tax was around 4.5% and value added tax was 1%, taking the total tax outgo to 5.5%. Now the input tax credit is available on taxes paid on the purchase of construction materials, which can be the adjusted against the GST liability. Even after this adjustment, the effective tax rate is significantly higher, and the stamp duty is still applicable, which increases the costs for the consumer. State governments should abolish stamp duty or align it with the GST rates.Falling interest rates have hurt senior citizens who may not have the risk appetite for equityoriented instruments. To cushion the impact, senior citizens with an income of up to Rs 10 lakh per annum should be offered a deduction of Rs 75,000 towards interest on fixed income instruments. In addition, they may also be allowed a deduction of Rs 50,000 for their routine medical expenses.The tax rules for NRIs are quite different from those that apply to residents. The process of tax reporting is very elaborate, the TDS rules are quite stiff and they don’t enjoy some of the tax privileges that normal citizens are eligible for. For instance, NRIs are not eligible for tax deductions for the medical treatment of a disabled dependent under Section 80DD, or the treatment of a family member suffering from a specified diseases under Section 80DDB. The Budget needs to fix this anomaly. If an NRI is paying for the treatment of relatives in India, he should be eligible for the same deductions that residents are.Carrying out multiple KYC compliance processes is a major pain point, not only for investors and investors, but also for financial services companies. Bank accounts are already linked to a holder’s PAN and will soon be linked to their Aadhaar as well. This will automatically verify the identity of the investor. Aadhaar linkage should be treated as a centralised KYC, so that the investor does not have to repeat the process.In recent years, the government has offered various tax sops for investing in the National Pension System (NPS). Even so, the pension scheme has not seen the desired success as was anticipated by the government. Much of this is due to the tax treatment of the NPS corpus at the time of retirement. While 60% of the corpus can be withdrawn at the age of 60, only 40% is tax free and the remaining 20% is taxed as income. This is a major dampener while evaluating NPS as an investment option. The Budget should review the current provisions for taxing the NPS if the government wants to encourage people to opt for the scheme and make India a pensioned society.