The 2024 Budget has introduced several amendments that have sparked significant debate among taxpayers and financial experts. Two amendments that stand out are the removal of indexation for long-term capital gains and the introduction of TDS (Tax Deducted at Source) on the salary and interest of partners in partnership firms. This article critically analyzes these amendments, exploring their implications and the rationale behind them.
The removal of indexation is considered unfair by many. The Finance Minister justified this change by reducing the tax rate from 20% to 12.5%. However, this reasoning lacks logic because indexation automatically accounts for inflation. Taxing the gains earned over time at a reasonable rate is the prerogative of the exchequer. The government can adjust the tax rate according to the prevailing average rate of tax, considering all income earned during the year. Lawmakers should remember the original purpose of indexation, which was welcomed when it was introduced, as it helped mitigate the impact of inflation on long-term capital gains.
The history of indexation reveals that it was introduced with much fanfare to ensure that taxpayers were not unfairly taxed on inflation-induced gains. Removing this benefit could result in taxpayers paying more than their fair share on real returns, as the indexation took inflation into account, ensuring a fair tax burden.
When selling a property, it’s important to know that recent changes mean you can no longer adjust the purchase price for inflation. This change, announced in the 2024 budget, means that when you sell a property, you won’t be able to use inflation to reduce your capital gains.
A significant concern is that this change affects all capital gains taxes, including real estate. This could mean that taxes might consume all real returns for many assets. For instance, equity returns rarely exceed 3-4% above inflation. A 10% tax on full returns might take 20-30% of your inflation-adjusted gains. Even if your inflation-adjusted returns are negative, you may still owe this tax, reducing your purchasing power and potentially taxing you even when your actual wealth has decreased.
From July 2023, the sale of houses bought after 2001 will attract a 12.5% long-term capital gains tax, potentially increasing to 14.95% with additional surcharges and cess. Unless you buy another property to defer the tax, this change could significantly impact taxpayers.
The Finance Secretary stated that this amendment aims to rationalize taxes and create a simple, understandable regime. Despite concerns, the Budget retains indexation benefits for properties bought or inherited before 2001.
The introduction of TDS provisions under Section 194T for the interest and salary of partners in partnership firms has also raised concerns. This change increases the compliance burden for assessees and the Income Tax Department, as firms without a TAN (Tax Deduction and Collection Account Number) must now obtain one, deduct tax, pay before the due date, and file quarterly TDS returns.
Currently, partnership firms are taxed at 30% without any basic exemption limit after allowing interest at 12% on outstanding credit balances and salary within the limits prescribed by the Income Tax Act. Typically, partner salaries are decided at the end of the year based on the profits earned. If profits are insufficient, partners may forego their salary to reduce their tax burden, yet still withdraw money throughout the year for daily expenses.
In summary, while the government aims to simplify and rationalize the tax regime with these amendments, the removal of indexation and the introduction of TDS on partner salary and interest present significant challenges. These changes could lead to higher tax burdens and compliance issues, impacting both taxpayers and the Income Tax Department.
In summary, while the government aims to simplify and rationalize the tax regime with these amendments, the removal of indexation and the introduction of TDS on partner salary and interest present significant challenges. These changes could lead to higher tax burdens and compliance issues, impacting both taxpayers and the Income Tax Department.
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