Background
The Union Budget 2022 is around the corner. Finance Minister Nirmala Sitharaman and her team is all set to announce the Union Budget 2022 as on 01 February 2022. At the same time, the Indian economic recovery may take another setback with rising COVID-19 cases due to the new Omicron variant. As lockdowns and restrictions are being imposed by several states to control the COVID-19 cases, it has given an indication that the pandemic is going to last longer.
Thus, taxpayers are expecting certain relief from Union Budget 2022.
In this backdrop, this article attempts to highlight “10 Key Budget expectations” from different categories of taxpayers’ perspective i.e. Individual, Corporates and Non corporate-non individual.
Budget expectations from Individual perspective:
1. Increase in standard deduction limit to INR 1 lakh: The Finance Act, 2018 introduced standard deduction of INR 40,000 to salaried employee with effect from 01 April 2019. This limit was increased to INR 50,000 by the Finance Act, 2019 with effect from 01 April 2020. However, considering the impact of inflation particularly the inflated cost of medical expenses on account of COVID-19, it is expected that the Government increases this threshold to INR 1 lakh.
2. Increase the threshold of taxability of income on Provident Fund (PF): The Finance Act 2021 amended the provisions of section 10(11) and 10(12) of the Income Tax Act, 1961 (The Act) to tax income on PF contributions above INR 2.5 lakh in a year. This limit was further increased to INR 5 lakh for PF accounts having no contribution from employers. However, these limits are harsh for PF accountholders planning their own retirement and contributing to PF to maximise their savings. Further, the memorandum to Finance Bill 2021 explained the rationale of this amendment as the amendment is to avoid misuse of this provision by rich individual who are investing huge amount in PF and claiming the entire interest as exempt.
Given the threshold of INR 2.5 lakh and INR 5 lakh, it appears that even an average earning individual may be covered and will have to pay tax. Thus, it is expected from Union Budget 2022that the Government would raise these thresholds to INR 7.5 lakh
3. Increase the limit of deduction of interest on housing loan: Under the existing the provision1 of the Act, a taxpayer may claim deduction of interest on housing loan while computing income from house property up to a limit of INR 2 lakh. This threshold was fixed by the Finance (No.2) Act, 2014 by substituting the erstwhile threshold of INR 1.5 lakh. Considering the adverse impact of COVID-19 pandemic which has caused liquidity crisis amongst taxpayers, this limit may be enhanced to INR 5 lakh. This will not only motivate the middle class individual taxpayers to invest in residential house but also help the real estate developers to mitigate the adverse impact of COVID-19 to some extent.
4. Clarification on tax treatment of COVID assistance loan: In view of persistent COVID-19 pandemic, employers are providing financial assistance to their employees for meeting the medical expenses. Some employers are providing financial assistance in the form of interest free loan to combat this deadly virus.
Under the Income Tax Law2, interest free loan provided by employer to employee is generally taxed as perquisite. However, the Act also provides certain exception which inter alia include3 loans made available for medical treatment in respect of specified diseases. The specified diseases are prescribed under the Income Tax Rule4, 1962. However, COVID-19 is not specifically covered therein. Therefore, it is expected that COVID-19 may be covered within the ambit of prescribed disease so that employee does not have to pay tax on such financial assistance.
Also, the Central Board of Direct Tax (CBDT) has released a Press Release5 which provides tax exemption on receipt of financial assistance from employer and well wisher. However, legislative amendment in this regard is still awaited which leads to lack of clarity about the meaning and scope of “financial assistance” referred in the said Press Release.
Thus, it is expected that the Government would consider making necessary amendment to give effect to the Press Release.
5. Increase in deduction limit and stamp duty value limit under section 80EEA: The Finance (No.2) Act, 2019 introduced section 80EEA to provide deduction up to INR 1.5 lakh of interest on residential housing loan subject to certain conditions which inter alia include following:
(i)The stamp duty value of residential house shall not exceed INR 45 lakh;
(ii) The loan should be sanctioned between 01 April 2019 and 31 March 2021 and
(iii)The assessee shall not claim deduction of such interest under any other provisions of the Act.
The limit of stamp duty value of INR 45 lakh is less for house property in urban area. Also, the deduction limit of INR 1.5 lakh is not justified as the taxpayer will not be able to claim deduction under any other provisions of the law.
Further, the provision requires that the loan should be sanctioned between 01 April 2019 and 31 March 2021. In view of the COVID-19 pandemic, many taxpayers have not been able to avail the benefit of this section. Therefore, it is expected that the Government would consider extending this date further by ayear or two. Again, this will also help real estate developers to mitigate the adverse impact of COVID-19 pandemic to some extent.
6. Scope of section 80DDB should be extended to cover medical expenditure on COVID-19 treatment: Under the Act, section 80DDB provides deduction on medical treatment of himself or his dependents of prescribed diseases or ailments6 up to INR 40,000 or actual medical expenditure, whichever is lower. In case of dependent being senior citizen, the limit has been extended to INR 1,00,000.
In view of the persistent COVID-19 pandemic, it is expected that the Government would extend the scope of “disease or ailment” under this section to cover COVID-19 so that taxpayers can claim deduction of medical expenses incurred on themselves and their dependents.
Alternatively, the Government may consider extending the scope of section 80D to allow deduction on medical treatment of non-senior citizen family members7 also. Further, the existing aggregate limit8 prescribed therein should be extended by INR 50,000.
7. Clarification on applicability of tax audit on partners of firm: In case of a partner of a partnership firm, his share of profit is exempt under section 10(2A) of the Act as such income is taxed in the hands of the firm. The remuneration and interest received by the partners from the firm is taxable as Business Income. In such cases, an issue arises as to whether the partners are required to get their accounts audited if their share in profit and/or remuneration / interest from the firm exceeds the threshold provided in section 44AB notwithstanding the fact that the accounts of the partnership firm have already been audited under section 44AB?
In this regard, a clarificatory amendment should be made in section 44AB to provide that for the purpose of applying Section 44AB in the hands of the partners, the share of profit and/or remuneration/interest received from the firm shall not be taken into account while determining the amount of threshold provided in Section 44AB.
Budget expectations from Corporates perspective:
8. Extend the scope of section 37 to allow deduction of Corporate Social Responsibility (CSR) contribution towards COVID-19: The company law9 requires certain companies to contribute towards prescribed CSR activities. However, the Act10 prohibits deduction of expenditure incurred on CSR activities from business income.
The Government has been requesting corporates to contribute towards COVID relief fund. Further, the Ministry of Corporate Affairs (MCA) extended11 the scope of CSR activities to cover COVID 19.
In view of above, a lot of corporates are contributing towards COVID relief funds as CSR contribution. Further, many corporates are creating health infrastructure for COVID care; establishing medical oxygen generation and storage plants; manufacturing and supplying Oxygen concentrators, ventilators, cylinders and other medical equipment for countering COVID-19. These are eligible CSR activities under the Company Law. However, these corporates are deprived of any deduction under the Act because of specific restriction imposed under section 37. Although certain corporates making donation/contribution to any fund or institution may claim deduction under section 80G12, yet the corporates which are themselves incurring expenses on creating health infrastructure for COVID 19 will not be eligible to claim any deduction even under section 80G.
Thus, it is expected that the scope of section 37 would be extended to allow deduction of aforesaid expenditure.
Budget expectations from non-corporates non individual’s perspective:
9. Reduce the rate of tax of non-corporates (including LLPs and AOPs): The Government has recently reduced corporate tax rate13 and minimum alternate tax (MAT) rate14 which is a welcome move of the Government. However, the rate of tax of non-individual such as partnership firm, limited liability partnership firm(LLP), AOPs have remained unchanged. Also the alternate minimum tax (AMT) of non-corporates have also remained unchanged. Due to this, such non corporates are not having level playing field which is resulting in restructuring planning by the certain LLPs and partnerships firms.
In order to provide level playing field to non corporates and enable ease of doing business, it is suggested that rate of tax of all non corporates taxpayers should be reduced to 25% and the rate of AMT should be brought down to 15%.
10. Extend the scope of presumptive taxation under section 44AD to LLP: Section 44AD provides presumptive taxation whereby eligible assessee may offer 8% of total turnover or gross receipt to tax provided that the total turnover or total gross receipt shall not exceed INR 2 crore. The rate of 8% is further reduced to 6% in respect of amount of turnover or gross received through banking channel.
The eligible business is defined under explanation which includes an individual, Hindu Undivided Family (HUF) and a partnership firm but it specifically excludes LLP.
Under the Act, LLPs and partnership firms are treated at par. Even section 44ADA which provides presumptive taxation for certain professionals does not exclude LLP.
Thus, in order to bring parity between partnership firm and LLP, it is expected that the benefit of section 44AD would also be made available to LLP.
CA Vipul Sheladiya
Shealdiya & Jyani
Chartered Accountants