Budget 2020: FinMin seeks industry inputs on direct, indirect tax changes

FM Nirmala Sitharaman will be announcing her second Union Budget on February 1
The finance ministry for the first time has sought suggestions on changes in direct and indirect tax rates from the industry. This comes at a time when a revenue shortfall and consumption slowdown are threatening to upset the government’s finances.

In a letter to industry associations, the department of revenue has sought suggestions for “changes in the duty structure, rates and broadening of tax base on both direct and indirect taxes”.

Finance Minister Nirmala Sitharaman announced tax cuts for the corporate sector besides other sops after the Budget in July as urgent measures to arrest economic slowdown. 

Sitharaman will be presenting her second Union Budget on February 1. The comments need to be sent to the department by November 21. The finance ministry will begin its pre-Budget consultations with representatives of different sectors and stakeholders.

“Your suggestions and views may be supplemented and justified by relevant statistical information about the production, prices, revenue implication of the changes suggested and any other information to support your proposal,” the ministry said.

Sitharaman in September announced steep cuts in corporation tax, effective April 1 this fiscal year. 

The corporation tax rate was cut to 22 per cent from 30 per cent for existing companies that do not enjoy any exemptions, and to 15 per cent from 25 per cent for new manufacturing companies. 

With surcharge and cess, the effective tax rate for the existing companies has come down to 25.17 per cent from 35 per cent.

As against initial estimates of a revenue outgo of Rs 1.45 trillion, the income tax department is estimating a reduction of around Rs 1 trillion. 

The corporation tax rate cut has triggered a demand for a reduction in personal income tax rates as well.

However, revenue collections have emerged as a big concern for the government with the corporation tax mop-up at 0.5 per cent in the first seven months as against a target growth rate of 15.4 per cent. 

Similarly, personal income tax has shown a growth rate of just 5 per cent so far, against a target of 22 per cent for FY20. 

As for indirect taxes, goods and services tax collection has been much below expectations.

India’s growth fell to a six-year low of 5 per cent in the April-June quarter and is estimated to slump to around 4 per cent in the second quarter. The official data on Q2 gross domestic product will be released on November 30.

“As regards direct taxes, while forwarding your proposals, please take into consideration the recent initiatives of the government to reduce corporate tax rates applicable to domestic companies” provided they do not avail of any other tax rebate or concession, the letter said. 

The panel to overhaul the Income-Tax Act, headed by Central Board of Direct Taxes member Akhilesh Ranjan, has suggested an increase in the threshold for exemption from income tax to Rs 5 lakh a year from the current Rs 2.5 lakh. Besides, a new slab of 35 per cent for those earning Rs 2 crore and more has been recommended. 

It has also recommended retaining the long-term capital gains tax and the securities transaction tax while abolishing the dividend distribution tax. The panel has instead suggested imposing tax on the person receiving dividend, sources in the know said.

“The government policy with reference to direct taxes in the medium term is to phase out tax incentives, deductions, and exemptions while simultaneously rationalising the rates of tax. It would be also desirable that while forwarding the suggestions/recommendations, positive externalities arising out of the said recommendations and their quantification are also indicated,” it said.

It has also sought suggestions related to central excise duty and Customs duty.

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