The finance ministry is considering giving relief to taxpayers in the form of higher income tax deduction, said two government officials familiar with the developments.
The current relief is Rs 2 lakh and discussions are on to increase it to at least Rs 2.5 lakh. The extra deduction, however, will be available only on investments made by taxpayers in government infrastructure projects, the officials said.
“Discussions are on to give relief to taxpayers in the form of higher tax deduction. The higher deduction will be for investing in infrastructure projects in the form of bonds or through equity-linked savings schemes,” said a government official, who asked not to be named. These investment routes are likely to have a lock-in period, he added.
At present, taxpayers get relief under 80C, 80CC and 80 CCD of the Income Tax Act. The deduction is offered for investments made in provident fund, public provident fund, and life insurance premiums.
Payments made towards tuition fees of children and home loans also earn tax relief. An additional deduction up to Rs 50,000 is offered for investment in National Pension System (NPS).
“There is intent to give tax relief to as many taxpayers as possible, but a higher deduction will mean loss of revenue so the exact quantum of the relief will depend on the government’s fiscal elbowroom,” said another government official.
With rising global crude prices putting pressure on the government’s subsidy bill, depressed collections from Goods and Services Tax (GST) in its first year and the need to increase spending in infrastructure, the government has to be cautious with populist measures if the path of fiscal consolidation is to be maintained.
“A higher tax deduction for investment in government infrastructure projects would mean more money will be channelised into these projects and in capital markets. Every Rs 10,000 increase in the deductions will lead to an additional investment of Rs 7,500 crore, if we consider 75 lakh people pay income tax in India,” said Girish Vanvari, partner and head, KPMG India.
In 2017, the government had provided relief to taxpayers with annual income between Rs 2.5 lakh and Rs 5 lakh by reducing the rate from 10% to 5%.
And in 2014-15 the government had increased the tax deduction from Rs 1 lakh to Rs 1.5 lakh for investments in NPS.
The government is also working on removing concerns of angel investors putting money in start-ups. It is also likely to liberalise the definition of valuation.
“There has been extensive demand for a tax holiday to angel investors in start-ups for the first few years. Let us see what can be done,” said the second officer quoted above.
Angel investors typically invest in seed capital for start-ups and if the valuation of the company’s shares exceeds the market valuation, it attracts income tax under section 56 (2, VII B).
These valuations come under the taxman’s radar on suspicions of money laundering.
At present, venture capitalists are exempt from this provision. And start-ups that meet the government’s definition as notified by DIPP, can avail a three-year tax holiday in the first seven years of their existence.
“In order to avoid disputes and litigation, and to provide a favourable investment environment, it is necessary to carve out an exception from tax issues emanating from the valuations. This should be for investments made in the start-ups across the board and not restrict it only to the those recognised and registered with the government,” said Vikas Vasal, national tax leader, Grant Thornton India.