Breaking down the Tax Proposals from Union Budget 2023-24 (PART-B)

Introduction

Finance Minister Nirmala Sitharaman provided major relief in personal income taxes by introducing a simplified tax regime with lower rates. This aims to reduce the tax burden on individuals and boost disposable incomes. Overall, the tax proposals aim to stimulate growth through tax relief and incentives, with a focus on supporting manufacturing, exports, and green development. The impacts would depend on how significantly the measures reduce costs and burdens, and how effectively they achieve the stated objectives.?

Personal Income Tax:

• The rebate limit increased to Rs 7 lakh for incomes up to Rs 7 lakh in the new tax regime

That individuals with taxable income up to Rs 7 lakh will not have to pay any income tax in the new tax regime. Earlier, the tax rebate limit was Rs 5 lakh, meaning there was no tax on income up to Rs 5 lakh. By increasing this limit to Rs 7 lakh, individuals with income up to Rs 7 lakh will now get a 100% tax rebate and pay no income tax. This benefits lower and middle-income individuals, putting more money in their hands to spend and boost the economy. However, some analysts argue that for those who are close to the Rs 7 lakh income mark, it is discouraging them from working or producing goods or services. This could be done through #taxes, regulations, or other means.

• Tax slabs reduced to 5 with an increased exemption limit of Rs 3 lakh in the new regime providing relief

It reduces the number of income tax slabs from the existing 6 to 5 in the new tax regime. It also increases the basic tax exemption limit from Rs 2.5 lakh to Rs 3 lakh. This means that income up to Rs 3 lakh will be exempt from tax in the new regime. With lower slab rates and a higher exemption limit, individuals will pay less #tax and gain relief, especially those with middle to high incomes. The simplified 5-slab structure also makes the tax system easier to understand and comply with. However, the revenue loss from these exemptions and reductions will need to be accounted for.

• Standard deduction of Rs 50,000 for salaried class and Rs 15,000 for pensioners under the new regime

It provides a standard deduction of Rs 50,000 for salaried individuals and Rs 15,000 for pensioners under the new tax regime. A standard deduction allows salaried individuals and pensioners to reduce their taxable income by a fixed amount. This means they will pay less income tax. By providing higher standard deductions, this proposal gives relief to salaried and pensioned taxpayers. The Rs 50,000 deduction for salaried individuals is higher than the current Rs 40,000 deduction. However, the revenue impact of these higher limits will need to be considered in the overall budget.

• The highest surcharge rate was reduced from 37% to 25% for income above Rs 2 crore reducing the max rate to 39%

It reduces the highest surcharge rate from 37% to 25% for individuals with taxable income above Rs 2 crore. The surcharge is an additional tax charged on top of the base income tax rate. By reducing the highest surcharge rate, the maximum effective income tax rate will come down from 42.74% to 39% for incomes above Rs 2 crore. This benefits higher-income individuals with tax savings. However, some argue that this disproportionately favors the rich and reduces the progressiveness of the tax system. The loss in revenue from this measure will also need to be factored in.

• The exemption limit on retirement fund encashment increased from Rs 3 lakh to Rs 25 lakh

It increases the exemption limit on retirement fund encashment from Rs 3 lakh to Rs 25 lakh. This means up to Rs 25 lakh of retirement fund proceeds can be withdrawn tax-free. Earlier, only Rs 3 lakh of such proceeds were tax-exempt. Raising the exemption limit significantly provides greater tax relief to those retiring or taking retirement funds. However, the higher limit may also be seen as benefiting higher-income individuals more. Additionally, the loss in tax revenue from this increase will need to be accounted for in the overall budget.

• The new income tax regime made defaults but an option to avail old regime continues

This makes the new simplified income tax regime the default regime. However, taxpayers will have the option to continue under the existing tax regime if they choose to. By making the new regime the default, most taxpayers will benefit from the lower rates and simpler structure. But taxpayers who may pay less tax in the existing regime due to various exemptions and deductions will have the flexibility to opt for the old regime. This balances simplicity with customization as per the taxpayer's needs. However, it could also make the tax system more complex with two regimes. The revenue impact would also depend on how many taxpayers chose the new or old regime.

Indirect Tax Proposals:

• The indirect tax proposals aim to simplify the tax structure by reducing the number of tax rates. Fewer rates simplify the system and compliance.

the proposals aim to make indirect taxes less complex and burdensome. This could enhance compliance and administration. However, there are also criticisms that a single rate may not achieve the objectives of progressive taxation or differentiate between essential and luxury goods. The effectiveness of such changes would also depend on the specific rates implemented and how broad a range of goods they apply to

• Basic customs duty rates were reduced from 21 to 13 except for textiles and agriculture

It reduces the basic customs duty rates from 21 to 13, except for textiles and agricultural goods. Basic customs duty is a tax on imports into India. Reducing customs duty rates makes imports cheaper and can help control inflation. However, it may negatively impact domestic producers as imported goods become more competitive price. The exceptions for textiles and agriculture are likely meant to protect these sectors. The revenue impact would depend on how to import volumes and the mix of imported goods change due to these revised duty rates.

• Minor changes in customs duties, cesses (Cess is a form of tax charged/levied over and above the base tax liability of a taxpayer), and surcharges on items like toys, bicycles, cars, naphtha?

This makes minor changes to customs duties, cesses, and surcharges on specific items such as toys, bicycles, cars, and naphtha (petroleum products). The changes could increase or decrease the duties on these items to achieve certain objectives. For example, customs duty on toys or bicycles may be reduced to benefit middle-income consumers. But duties on luxury cars may be increased to boost domestic production and provide relief to other buyers. The cess and surcharges are also being adjusted. These minor changes aim for specific, targeted impacts and changes to duties. However, they can make the tax system more complex and unpredictable. The revenue implications would depend on how imports and supply chains of the affected goods change due to these duty changes.

• Excise duty exemption on compressed bio-gas used in CNG to avoid cascading taxes

This provides an excise duty exemption on compressed bio-gas used in CNG (compressed natural gas). This exemption aims to avoid cascading taxes. Cascading taxes refer to taxes on taxes, where the same good or service gets taxed multiple times at different stages. Exempting excise duty on compressed bio-gas used to produce CNG, avoids double taxation and makes CNG more competitively priced. This could boost the adoption of cleaner CNG as a vehicle fuel. However, it also means lower tax revenue from CNG, which would need to be accounted for elsewhere in the budget.

• Customs duty exemptions on capital goods and lithium-ion cells for electric vehicle batteries

This proposal provides customs duty exemptions on capital goods and lithium-ion cells imported for electric vehicle batteries. By exempting these from import duties, it makes the imports cheaper for manufacturers. This is aimed at encouraging the domestic production of electric vehicles and batteries by reducing costs for manufacturers. It aligns with the government's push for more electric vehicles to reduce emissions and oil dependence. However, the revenue loss from these exemptions will need to be considered in the overall budget. It may also face criticism for potentially benefiting foreign suppliers more than domestic producers.

• Concessional duties on mobile phone parts and lithium-ion cells extended, open cell TV parts reduced

This proposal extends concessional customs duties on mobile phone parts and lithium-ion cells, which are used in batteries. It also reduces duties on open cell parts for TV panels. Concessional duties mean lower import taxes, which make the imports cheaper. Extending these for mobile phone parts and lithium-ion cells aims to support domestic manufacturing of mobile phones and batteries. The lower duty on open cell TV parts could reduce costs for TV makers. However, the revenue impact of these concessions would need to be accounted for in the budget. It may also face criticism for potentially benefiting foreign suppliers more than domestic industry.

• Basic customs duty reductions on denatured ethyl alcohol, acid-grade fluorspar (Fluorspar, the name used for fluorite when it is sold as a bulk material or in processed form), and crude glycerin

This reduces the basic customs duty on denatured ethyl alcohol, acid-grade fluorspar, and crude glycerin. Reducing the import duties on these goods makes the imports cheaper for Indian manufacturers and industries that use these as inputs. This could reduce costs and boost the competitiveness of downstream manufacturers. However, it also means lower tax revenue from these imports, which would need to be accounted for elsewhere in the budget. It may also face criticism for potentially benefiting foreign suppliers more than domestic producers of these goods. The impacts would depend on how significant India's domestic production and imports of these inputs are.

• Shrimp feed inputs and lab-grown diamond seed customs duties were reduced, and silver duties increased

It reduces customs duties on shrimp feed inputs and lab-grown diamond seeds but increases duties on silver. The reductions on shrimp feed and diamond seeds aim to lower costs for aquaculture and diamond producers, potentially boosting these industries. However, the increase in silver duties could raise costs for silver importers and domestic buyers. The revenue implications would depend on the changes in imports and supply/demand of the affected goods. These targeted duty changes are meant to achieve specific objectives, but they can also make the tax system more complex and unpredictable. The effectiveness of such changes would depend on the supply chains and competitive dynamics of the various industries involved.

• Rubber compound excise duty increased, specified cigarette national calamity contingent duty increased

This increases the excise duty on rubber compounds and the national calamity contingent duty on specified cigarettes. An excise duty is a tax on the production of goods, while a contingent duty is an additional tax levied under certain conditions. By increasing these duties, the government aims to generate more tax revenue from the affected goods. A higher excise tax on rubber compounds could raise costs for manufacturers that use it as an input. Higher cigarette duties are often aimed at reducing the consumption of harmful or luxury products. However, higher duties could also lead to higher prices, reduced demand, and more tax evasion or smuggling. The impacts would depend on market conditions and supply/demand elasticities.

• Single common IT return form to be rolled out; grievance redressal mechanism strengthened

It aims to introduce a single, common income tax return form to simplify the filing process. It also proposes strengthening the grievance redressal mechanism for income tax-related issues. A single return form would make tax filing easier by consolidating multiple forms into one. Strengthening grievance redressal would improve the handling of taxpayer complaints or issues with the tax system. These measures aim to enhance the ease of paying taxes and the taxpayer experience. However, the effectiveness would depend on how well the single return form is designed and grievance redressal is strengthened in practice. There could also be challenges in implementing a single form for all taxpayers.

• Better targeting of tax concessions with caps on capital gains and insurance policy proceeds

This aims to better target tax concessions by capping exemptions for capital gains and insurance policy proceeds. By capping certain exemptions and concessions, the government aims to limit tax leakage and make the system more progressive. The caps would put a ceiling on how much capital gains or insurance payouts could be exempt from tax. This could help reduce the misuse of exemptions by high-income individuals or corporations. However, it may be seen as an additional tax burden by those affected. The caps would need to be carefully designed to achieve the objectives of better targeting, while not being too restrictive. The revenue impact would depend on the specific caps and limits implemented.

• Extensions and new proposals on IFSC, IDBI loss carry forward, Agniveer fund, MSME benefits

It extends or introduces new tax benefits for specific purposes. The key points are:

• Extending tax benefits for funds located in IFSC (International Financial Services Centre) until 2025. This aims to attract more funds to the IFSC.
• It is allowing IDBI Bank to carry forward losses, which could help its recovery. This means that the bank can use its losses from previous years to offset its profits in the current year, reducing its tax liability. This could help the bank to become more profitable and financially stable.
• A new Agniveer fund for defense personnel, though details are unclear.
• Enhanced tax benefits for MSMEs (micro, small, and medium enterprises) to support their growth.

These targeted tax incentives are meant to achieve certain policy objectives. However, they can make the tax system more complex with many specific exemptions and concessions. The revenue impact would depend on how extensively the benefits are taken up and any conditions attached to them. Their effectiveness in achieving the stated goals would also depend on implementation and market conditions.

• Cooperative sector proposals include a lower 15% tax rate for new coops, higher cash limits

This provides tax benefits for the cooperative sector. The key points are:

• A lower 15% income tax rate for new cooperatives to encourage their formation.
• Higher cash transaction limits for primary agricultural credit societies and cooperative banks.

These measures aim to support the cooperative sector by reducing tax burdens and allowing more cash transactions. The lower 15% tax rate could incentivize the formation of new cooperatives. Higher cash limits reduce restrictions and benefit cooperatives that deal primarily in cash. However, the lower tax rate could be seen as an unnecessary concession, and higher cash limits could potentially enable more tax evasion or black money. The impacts would depend on the conditions and limits attached to these proposals.

• Start-up proposals like extended incorporation dates for tax benefits and longer loss carry forward

This provides tax benefits to support startups. The key points are:

• Extending the period for #startups to avail tax benefits by up to 2 years. This provides more time for startups to claim exemptions and concessions.
• Allowing startups to carry forward losses for up to 10 years instead of 7 years. This additional time could help more startups #benefit from loss carry forward, especially if they are not profitable in the initial years.

These measures aim to encourage entrepreneurship and reduce tax burdens for startups. However, the extended periods could be seen as unnecessary concessions. The impacts would depend on how many startups can claim the benefits and the conditions attached to them. The revenue implications would also need to be considered, given the potential tax leakage or revenue loss from such exemptions.

• GST prosecution threshold raised, compounding percentages lowered, some offenses decriminalized

This makes some changes to GST (Goods and Service Tax) prosecution and compounding. The key points are:

• Raising the threshold for launching GST prosecution to Rs 5 crore of evasion, from Rs 1 crore. This could reduce unnecessary prosecutions for minor offenses.
• Lowering GST compounding percentages for allowing taxpayers to pay fines to settle offenses. This could encourage more compounding and reduce litigation.
• Decriminalizing certain GST offenses with fines as an alternative punishment. This could reduce the burden on courts and discourage black marketing or other evasions.

These changes aim to simplify GST enforcement and make the system more efficient and less burdensome. However, some may argue that raising prosecution thresholds and lowering compounding rates could enable more tax evasion. The effectiveness of these proposals would depend on how they balance simplicity and strictness in practice.

Conclusion

For businesses and employers:

• The lower personal income tax rates will increase disposable incomes, which can boost spending on businesses' products and services. This stimulates growth for companies.
• Lower indirect tax rates and exemptions lower costs for businesses, especially exporters and manufacturers. This can increase #profit margins and competitiveness.
• Tax benefits for startups and cooperatives encourage entrepreneurship, which can benefit new ventures and companies.
• Higher limits and simpler procedures for #msmes reduce compliance burdens, benefiting small businesses. This can support the growth and development of MSMEs.

Overall, the proposals are aimed at stimulating growth, increasing competitiveness, and reducing inefficiencies for businesses. The impacts would depend on how significantly costs are reduced and how effectively the benefits are taken up and lead to greater economic activity or investment. However, there are also criticisms that some measures may unnecessarily benefit businesses or high-income groups rather than the broader economy.

For individuals and taxpayers:

• The new lower personal income tax rates provide significant tax relief and savings for most taxpayers. They have the choice between the new and old regimes based on their tax positions.
• A higher rebate limit benefits lower-income groups by exempting more of their income from tax. A higher retirement fund exemption limit benefits senior citizens by allowing more tax-free withdrawals.
• A higher standard deduction for salaried individuals increases disposable income by reducing taxable income. This puts more money in individuals' hands to spend or save.

Overall, the proposals aim to reduce tax burdens and increase disposable incomes for individuals, especially middle and lower-income groups. The impacts would depend on how significantly individuals' tax outgo is reduced and what the conditions are for the various exemptions or deductions. However, there are also arguments that certain measures may disproportionately benefit higher-income groups or incentivize tax evasion. Given the potential tax losses from higher exemptions or deductions, the revenue implications would also need to be considered.

For the Indian Economy:

• Lower personal income taxes and indirect tax incentives can boost consumer spending and investment, stimulating economic growth.
• Support for startups, MSMEs, and cooperatives can encourage entrepreneurship and job creation, contributing to development.
• Simpler tax regimes and procedures can make tax compliance easier, increasing revenue collection. This also enhances the ease of doing business, attracting more investment.

Overall, the proposals aim to boost growth and development through tax cuts and support for businesses. The impacts would depend on how significantly consumer spending, investment, and job creation are increased by the measures. However, there are also criticisms that some proposals may disproportionately benefit certain groups or have a significant revenue impact. Effective implementation and market conditions would also determine how successful the proposals are in achieving the stated objectives.