We need to end all income tax exemptions, or most of them: Arvind Panagariya

As Union Budget inches closer, income tax sops are back in discussions. While many experts advocate higher Section 80C limits, increase in standard deduction among other benefits, Arvind Panagariya, former Vice Chairman of Niti Aayog, has a contrarian view.

In an exclusive interview with Moneycontrol, Panagariya said, "It’s time we fixed the personal income tax system, and considerably simplified that. And much like what we have done with taxes on corporate profits, we need to end all exemptions, or most of them." If revenue is an issue, we can have four or five tax rates, he added.

It may be recalled, in the Union Budget 2020-21, the government introduced a 'new and simplified personal income tax regime' where income tax rates were significantly reduced for individual taxpayers who forgo certain deductions and exemptions like standard deduction and 80C benefits. Under the old tax regime, individuals are allowed to claim various deductions and reduce their tax liability. On the other hand, the new tax regime (introduced in Budget 2020-21) had a better (lower) tax rate, but denied as many as 70 exemptions and deductions available under the income tax laws (including LTC, HRA, standard deduction, deduction under chapter VI A, etc.)

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The new tax regime, which comes with lower tax rates and fewer tax benefits, was introduced in 2020 but has not found many takers yet. Most taxpayers still prefer to continue with the older regime while filing their tax returns, as the tax outgo in the older personal income-tax regime is lower if they make use of deductions such as under Section 80C and Section 80D.

However, the government is examining the possibility of increasing the tax-free slab to Rs 5 lakh in the two-year-old alternative personal income tax regime to make it more attractive, Business Standard reported on December 12.