What may have forced the government to make new tax regime the default

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The gradual move towards a new, simplified tax system has been on the horizon of the government since the new tax regime was first introduced under the Union Budget 2020. After all the new tax regime is about low deductions and lower taxes. Yet, a complete tilt was still hanging.

On Wednesday, finance minister Nirmala Sitharaman finally announced the government’s seriousness in marking this shift. The FM said the government proposes to make the new tax regime as the default setting for all income tax returns from April 1, 2023.

What forced the government’s hand?

The answer may lie in a series of specific complaints by taxpayers.

Tax processing centres and the tax department itself received complaints from individual assesses that a higher rate of tax was deducted even though they didn’t have any tax-saving or home loan.

“Since their taxes were deducted at a higher rate and they were clueless, there was agitation,” a senior official in the central processing centre confided Moneycontrol.  Later a section of professionals (chartered accountants) too came with issues linked to the same (higher tax deduction despite no tax exemption claims), this person said, asking not to be named.

The higher tax factor

The new tax regime offers a basic exemption limit of Rs 2.5 lakh and a 5.20% tax up to 5 lakh while a tax of 10.4% is deducted for income between Rs 5 lakh and  Rs 7.5 lakh. However, under the old tax regime individuals earning Rs 5 lakh to 7.5 lakh have a steeper rate of tax at 20%, with the permissible deductions and tax exemptions.

Look at this way—if you have an annual income of Rs 6 lakh, you would be paying a higher tax of Rs 33,800 under the old tax regime instead of Rs 23,400 under the new tax regime.

The tax outgo is higher for senior citizens. This lower taxes are because one forgoes upto 78 tax deductions and exemptions such as Section 80 C, Section 80 D of medical insurance, home loan deduction, education, house rent and leave travel allowance.

It is not known how many individuals opted for the new tax regime in assessment year 2022-23.

“More than 60% corporate tax is coming from the exemption free tax regime. Individuals data we don’t have, but this particular scheme a majority would prefer shifting to the new tax regime,” said Sanjay Malhotra, Revenue Secretary mentioned in the post-Budget press conference,

Moneycontrol spoke to tax professionals to confirm if there were any grievances they had to address. Karan Batra, managing partner, Chartered Club,  said those income-tax-return filers who used the tax portals, which typically use private software, prepare the returns based on the data one feeds. “The software doesn’t specifically ask for the regime to be followed. Based on the information supplied, the old tax regime was selected as default. Now the new tax regime would be considered as default.”

Clarity needed for procedure

That means the chances of a deduction at a higher tax rate would be reduced for those tax-filers who prefer a do-it-yourself approach to tax filing.

“In the zest of saving some money involved in filing tax returns, many individuals forgo a big tax-saving. But there are worthwhile benefits under tax-filing by engaging a tax professional,” said Sudhir Kaushik, co-founder and CEO of TaxSpanner.com.

It is worth mentioning here that apart from declaring the income tax regime you want to follow at the employer-level to claim the tax deduction at source (TDS) one needs to fill a form 10 IE to claim the new tax regime earlier. Clarity is awaited on the procedure to be followed to claim the old tax regime, now that the new tax regime has been made the default regime.