In an interview with Outlook Business, CBDT Chairman Ravi Agarwal talks about all the changes introduced to direct tax regime
Finance Minister Nirmala Sitharaman announced several changes to the direct tax regime in the Union Budget 2024. From increasing long-term capital gains tax on equity to changing the tax slabs, the first budget of Modi 3.0 introduced some major changes.
In an interaction with Outlook Business, Chairman of the Central Board of Direct Taxes (CBDT) Ravi Agarwal talks about the goals the government has in mind. He says that simplifying the tax regime and streamlining processes remain the most important priorities. As the number of taxpayers continues to increase at a steady pace, Agarwal says that the changes introduced in the budget were much needed.
He discusses the removal of indexation benefits, the increase of tax on equity, the abolishment of angel tax and the review of the IT Act 1961.
Edited Excerpts:
What broad goals of the government sparked several changes to the tax regime in the Union Budget 2024?
What one must ensure is certainty and clarity in the provisions. We must address the large volume of tax returns—last year, we processed over 8 crore returns the previous year. We need to cater to both tech-savvy members and those who are not. In tax administration, involving numerous stakeholders, standardisation is crucial.
Standardisation and simplification should be the guiding principles in administration. In 99.9 per cent of cases, I would respect whatever has been disclosed and offered for tax. Therefore, tax certainty, standardisation, and simplification are key.
For capital gains, standardising the long-term category at a 12.5 per cent rate regardless of the holding period is suggested. Like standard deviation in engineering, you draw the best-fit curve; some will be above the line, some below, but most will benefit. Some may have to pay more, but in the name of standardisation, this approach should be taken for the community's benefit.
Any tax provision impacts the economy and investor sentiments. While the intention may not have been to affect sentiments, the way opinions are formed is important. For example, the angel tax aimed to plug certain gaps without hindering startups. However, due to some hurdles, necessary relaxations were made after engagement with DPIIT (Department for Promotion of Industry and Internal Trade) . Simplification and standardisation make it easier to do business.
TDS (Tax Deducted at Source) rates have been rationalised; for instance, TDS for business transactions has been reduced from 1 per cent to 0.1 per cent, freeing up 0.9 per cent of liquidity that would otherwise be blocked. Similarly, rates have been revised downwards from 5 per cent to 2 per cent in certain categories. Since we were giving refunds anyway, blocking liquidity was unnecessary. For the salaried class, employers were not previously empowered to give credit for other TDS deducted, but this has now been incorporated, making more liquidity available for investment or spending.
Procedures have also been rationalised to reduce litigation and save time for taxpayers, tax administrators, and courts. Therefore, the procedures have been simplified.
Tax on stock market gains has been increased while it has gone down on start-ups and other unlisted assets. Does the government want to promote wealth accumulation and capital generation through entrepreneurship in the economy rather than just short-term gains in markets?
Yes, this is also one of the aspects. These are the derivatives of all these initiatives. As you mentioned, if you do the simple math, if a person has invested about one lakh rupees in the new regime and holds it for one year, seeing a threefold increase, the new tax regime is better than the old one. Even if the appreciation is beyond that, paying more tax makes sense.
If in a year, you see more than a threefold appreciation in shares, it is reasonable to pay more tax. There should not be any objection to that. Ultimately, some gains must be compensated with tax.
If there is a threefold increase in a year, paying a higher tax rate, say 12.5 per cent, is reasonable. Compare this to the normal rate of tax versus the capital gains tax, which is about one-third. We must consider that context too. Simplification does not necessarily mean a lower tax.
A survey said around 30 per cent of taxpayers find it difficult to meet Income Tax return deadline. Is the department looking at easing the process further?
Let me provide some data: as of yesterday (July 25), about 4.7 crore people have filed returns, which is more than an 8 per cent increase compared to last year. We are still seeing an upward trend. By July 31st, approximately 6.77 crore people had filed returns last year. Given the current trends, we hope to surpass this number and expect to receive about 30 to 40 lakh returns each day.
This is made possible by technological enablement, with a massive amount of data being processed in the background, including the pre-population of ITR (Income Tax Return) forms. About 600 crore transactions are involved, with 250 crore TDS transactions being processed.
With such large volumes of data, challenges due to concurrency factors are inevitable. However, whenever these challenges arise, Infosys and the technical team address them promptly. While there might be instances where the user experience falls short, the fact that we processed 28 lakh returns yesterday alone indicates that the system is largely functional.
One aspect of improvement is the simplification and standardisation of processes to leverage technology effectively. Another crucial aspect is simplifying procedures. For example, in case of assessments, previously, different years would receive multiple notices and multiple assessment orders at different times, possibly by different officers. This inconsistency and extended time period have been addressed by consolidating assessments. Now, there will be one assessment for every six years at one time, and appeals will be consolidated into a single appeal, reducing multiple interpretations and appeals.
This simplification benefits both businesses and the department by reducing litigation. Additionally, the time period for reopening cases has been reduced from six years to five years, and for specific cases, from 10 years to a shorter period. We are moving towards a more streamlined process.
What is the target of the comprehensive review of IT Act 1961 which was announced in the Union Budget?
The target is to make the Act simple enough for individuals to understand and appreciate its provisions. With the prefilled returns, many people are now able to file their returns on their own, whereas earlier they might have needed assistance from a chartered accountant.
The Act, however, remains a thick document, which can dissuade people from reading it. Complex transactions and multiple interpretations add to the confusion.
The goal is to simplify the Act so that it is easier for people to comprehend, thereby improving compliance. One way to achieve this is by cutting redundancies. If the same information is written in different parts of the Act, we can optimise it by consolidating it in one place. By reviewing and simplifying the Act, we can reduce its size and present it in a clearer, more understandable manner. This is the thought process behind the initiative.
Start-ups wanted retrospective removal of angel tax. While the tax has gone, the legal cases remain for the previous years. Will the government work out something on this?
Those who invested subjected themselves to the regulations in place. Moving forward, the investors' concerns have been addressed. As of now, the provisions apply from this financial year onward, while earlier provisions remain for the previous years.
If the rules were brought in, the assumption is that people followed the law. If they did, then any notices would be irrelevant because compliance was maintained. Therefore, no adverse action would be taken against them. However, if someone tried to game the system, the relevant laws and rules would address that.
There has been a lot of heartburn due to the removal of indexation benefits in real estate. How would you defend the move?
The point is that when people hold property for a long time, they do so for various reasons. One reason is that the return on investment is high. Another reason is that they need a house or property for living. We also need to consider how much appreciation has occurred over time. In this context, if property appreciates more than 2.5 times in 10 years, the new tax regime is beneficial.
Let us consider that in most cases, property rates have increased by 2.5 times or more in 10 years. If they have, the tax on the capital gain would be lower under the new regime than the old one. Instead of relying solely on examples and numbers, investors should evaluate their own properties and determine whether the new or old tax regime is more advantageous based on the holding period. While some cases may result in higher tax liability under the new regime, these are likely to be very few.
Furthermore, rollover provisions are available. If you sell a property and purchase a new one, capital gains tax will not apply. Additionally, under the new regime, if you purchase a property and sell it two or three years later, you are now subject to a 12.5 per cent tax instead of the previous 20 per cent. This change is generally more favourable.
Overall, we should consider the entire perspective rather than just mathematical calculations. Each person should assess their property, its location, and its value increase. In most cases, they will find that the new regime is simpler and better from a tax perspective.