Budget 2022: Is the new tax regime appealing enough?

The Hon’ble Finance Minister (‘FM’), during the Budget speech (2020), highlighted that the extant Income Tax Act was riddled with various exemptions and deductions, which make compliances by the taxpayer and administration by the tax authorities a burdensome process. It was further mentioned that it was almost impossible for a taxpayer to comply with the extant provisions of the Income-tax law without taking help from professionals.

The Finance Ministry, recognizing this issue, sought to remediate the same by introducing a new tax regime as an electable alternative to the existing one more particularly for the individuals.

Given that the provision is yet to be improved and amended to provide the holistic and simplistic approach that the Government seeks for the lower to middle-income earning members of the country, it would be imperative that the new tax regime serves its purpose by not only eliminating administrative hassles, but providing sufficient utility and value in such reduced cumbersomeness.

Practical experiences gathered on new tax regime

Since the inception of the new tax regime, professionals noticed that many individuals didn’t opt for the benefits of the reduced tax rates/ slabs under the new tax regime – leading to the assumption that the larger stratum of the population still opts for the old scheme of tax slabs, exemptions and deductions, it being more beneficial when compared to the new tax regime.

Proposition/ expectation from upcoming Union Budget

It would make a significant difference to the subject population if the Government seeks to amend few provisions to include some of these major exemptions/ deductions – be it HRA, standard deduction or 80C deductions.   Having a roof over one’s head is one of the basic needs of a human; it would be detrimental to the individual to be taxed on that part of the earnings which is earmarked for expenses on their dwelling, given the Government’s push for housing for all.

Second, social Security schemes were introduced into the State to promote current savings to aid at times of unemployment/ retirement – providing 80C deduction/ benefits further promotes such individual social welfare benefits – the new regime in a way defeats the very objective to instill the habit of savings for future uncertainties, the individual loses the incentive of obtaining such tax benefit on savings for the future.

The above instances if considered appropriately, may bring in much-needed cheer for the individual taxpayers to consider the new tax regime over the old regime.

Conclusion

It is fairly understood that the Government cannot shell excessive deductions and/or exemptions in addition to the already slashed tax rates under the new regime. However, it would be worthwhile to evaluate whether providing at least one significant additional incentive to the new tax regime is substantial, and effectively brings in an incentive for the designated taxpayers to consider it over the old tax regime. Whilst Government may look to evaluate the same, it may also need to revisit / remove / place enhanced restrictions on the provision to elect tax regimes interchangeably more than once (in case of income reported from business and profession).  

Views are personal. The author is partner, Grant Thornton Bharat LLP. It has been written with inputs from CA Sudeep Das and CA Ridhi Sanghvi.