Low rate regime: Why corporation tax is a hit but not personal tax?

The government offered an option to companies to opt for a lower tax rate regime with a few exemptions in 2019. A few months later, it came out with a similar (not the same) scheme for personal income taxpayers with an annual gross income of Rs 15,00,000. While the new corporation tax regime has drawn a good response, the personal income tax regime seems to have attracted only a lukewarm response. 

An analysis of the impact of the concessional tax rates for companies shows that 15.85 per cent of the companies having 62.01 per cent of the total income have opted for the 22 per cent tax scheme and 0.14 per cent of companies with a minuscule income opted for taking benefits under the 15 per cent tax regime in 2019-20.

However, when it comes to personal income taxation, the progress does not seem to be that huge, though the data is yet to come in the public domain. Revenue secretary Tarun Bajaj earlier this year had said, "A very few would have taken it (concessional tax regime) because if I find that I have to pay less tax by even Rs 50 in a particular regime, I'll adopt that regime."

He pointed out that the new regime will not gain traction unless this old regime is disincentivised and incentives are given for the new regime with no exemptions. “And unless we do that, we will not be able to simplify the tax rates," he said.

In September 2019, Finance Minister Nirmala Sitharaman gave an option to domestic companies to avail of a lower tax rate of 22 per cent (25.17 per cent inclusive of surcharge at 10 per cent and cess at four per cent).  No exemption or incentive shall be allowed to be claimed by such companies under this regime. Additionally, no minimum alternate tax (MAT) would be levied on such companies.

Also, in order to give a boost to the ‘Make-in-India’ initiative, fresh investment in a company set up after October 1, 2019, in the manufacturing sector would have an option to pay tax at the rate of 15 per cent (17.16 per cent including surcharge of 10 per cent and cess of four per cent), provided such company starts manufacturing on or before 31 March 2023. This date was later extended by one year.

A company that does not opt for the concessional tax regime and avails of the tax exemptions, and incentives, would continue to pay tax at the pre-amended rate of 30 per cent (approximately 34.94 per cent with cess and surcharge).  However, these companies can opt for the concessional tax regime after the expiry of their tax holiday, or exemption period and the MAT rate for such companies will be reduced from 18.5 per cent to 15 per cent. The option once exercised can not be withdrawn subsequently.

Then from 2020-21 onwards, the Budget gave an option of a lower personal income tax regime to those earning up to Rs 15 lakh, provided they forgo some exemptions. The new tax slabs now stand at five per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent and 30 per cent. The old regime has the same 10-20-30 per cent slabs. Meanwhile, the surcharge on income tax went as high as 37 per cent for those earning over Rs 5 crore in a year.

Even if a taxpayer opts for a new tax regime, certain exemptions such as money received for gratuity, leave encashment, voluntary retirement scheme etc, are still available. There are also various deductions still available, such as conveyance allowance for expenditure incurred for travelling to work, investment in notified pension schemes, any allowance for travelling for employment or on transfer, etc.

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But why has the option for a lower rate regime personal income tax not gained traction, while companies are opting for it in the corporate tax regime?

Amit Maheshwari, tax partner at AKM Global, said the new regime has not been attractive for a large segment of individual taxpayers as it does not allow them to claim some very common deductions and exemptions.

"Many individuals who would be paying rent, EMIs for home loans, life and medical insurance, tuition fee for children, etc, which are all very regular expenses may find the older regime to be much more beneficial than the newer one whereas, for corporations, the new regime provides a lower rate with no exemptions," he said.

“Claiming exemptions have always been litigation-heavy in the corporation tax regime and a less tax rate with no chance of litigation will be preferred over a higher rate but with more exemptions, which are prone to challenge”, he added.

Sonu Iyer, tax partner and national leader - People Advisory Services -- at EY India, said tax savings in case of the concessional tax regime in personal tax are very small and that too at the cost of the sacrifice of most deductions, which the individual is eligible to claim in the old tax regime.

“On the other hand, there are huge savings on corporate tax with 25.17 per cent tax rate since most corporations are not eligible to claim the various deductions and incentives required to be sacrificed”, she said.

For instance, she said Special Economic Zone benefits have anyway been phased out. "In-house research & development incentive has also been scaled down. So the cost of sacrifice when opting for a concessional tax regime for corporates is relatively low or negligible. Hence the trade-off is better for corporations than individuals in their respective concessional tax regimes," Iyer said.

“Further, even after opting for lower tax rates, corporations can still claim some benefits like Section 80JJAA for new employees, which an individual taxpayer can also claim but there are very few individuals who claim this benefit”, she said. 

Section 80JJAA provides for a deduction equal to 30 per cent of additional employee cost incurred in the course of such business in the previous year, for three assessment years.

Tapati Ghose, partner at Deloitte India, said for personal income taxpayers with income up to Rs 500,000 in a year the concessional tax regime is not beneficial as the rates are similar.

For those with income up to Rs 10 lakhs, typically the old regime is more beneficial. The amount of savings under the new tax regime is lower when compared with the tax relief from a host of exemptions and deductions under the old regime. A typical taxpayer would claim a deduction for HRA, Chapter VIA and the salaried would be entitled to standard deduction. A large section of the taxpayers falls in this band. Chapter VIA provides deductions for investments in insurance, pension etc.

"An employee leaving the company and entitled to tax benefits for gratuity and leave encashment under the old regime would also not wish to opt for the new regime," Ghose said.

“Further, there is no tax variance on capital gains income under the old regime or new regime either”, she added.

“The regime is beneficial for individuals who are not entitled to exemptions and deductions. Examples of such individuals can be inbound expatriates, senior citizens with only pension and investment, interest income”, she said.

"A few individuals may consider availing of the scheme simply because no documentation is required to be maintained or submitted.  However, if due to some reason, the return is filed belatedly, the benefit is not available under the new tax regime," she said.

Individuals and Hindu Undivided Families (HUFs) with business or professional income may exercise this option before the due date of filing the return. Once this option is exercised, they will have to continue with the new regime for that year and all subsequent years, Ghose explained.

They have only one chance to revert to the old regime and once reverted, they become ineligible to exercise this option for any future years (unless they cease to have business /professional income), she said.

Certain deductions such as depreciation, etc are also not available under a simplified regime. This makes the new regime unattractive for those with business and professional income, she said.

It is widely believed that the government will be simplifying the tax regime in the next Budget. Bajaj had said, "some attempts have been made in the past (in simplifying the tax regime), and we have not succeeded in that. I think we need to make a sincere attempt now."

He has a broad idea of what that scheme should be. "What should the simple regime be? The simple regime should be broader tax slabs, lower taxes, and no exemptions. If I make money, I should pay taxes. I should not have 100 methods of trying to see that if I take this exemption if I take this exemption, if I take this route, I will not pay tax. If we keep doing that we are in a maze and the law will only become complex day to day,” he had said.