Introduction

The Interim Budget 2024, while lacking major tax overhauls, presented three key proposals worth noting. It proposes exploring the integration of agricultural income with non-agricultural income for taxation purposes. The budget suggests revisions to Tax Collection at Source (TCS) rates for various transactions. TCS involves a portion of taxable income being withheld by the payer and deposited to the government on the recipient’s behalf. The most prominent proposal is the withdrawal of outstanding direct tax demands up to specific limits for certain past years. This essentially translates to the government potentially waiving small, uncollected tax dues from previous years, offering some relief to taxpayers.

Withdrawal of outstanding direct tax demands

The Interim Budget 2024 brought significant news for Indian taxpayers with the proposed withdrawal of outstanding direct tax demands. These demands often disputed and a source of anxiety, have also impeded the refund process in the past.

The government aims to offer relief by withdrawing all disputed demands up to ₹25,000 for the period up to the financial year 2009-10 and up to ₹10,000 for the period between 2010-11 and 2014-15. This initiative is expected to benefit a significant number of taxpayers, estimated to be around 1 crore (10 million).

This move has a two-pronged benefit: it aims to improve ease of living and ease of doing business for taxpayers by reducing unnecessary burdens associated with disputed demands. Additionally, it will help clear the backlog of minor disputes that have been lingering in the system for years.

It is important to note that this withdrawal currently only applies to disputed demands, not undisputed ones or those exceeding the specified limits. While the announcement was made in the Interim Budget, details regarding the specific implementation mechanism, notification process for taxpayers, and the method to avail this benefit are still awaited from the Central Board of Direct Taxes (CBDT).

Taxpayers are advised to stay informed by following official channels for further updates from the CBDT. This will provide clarity on eligibility criteria, the claiming process, and the timeline for implementing this withdrawal, allowing them to benefit from this initiative effectively.

Partial integration of Agricultural Income

The partial integration of agricultural income with non-agricultural income was proposed in the Interim Budget 2024-25, signifying a significant change in India’s tax landscape. While agricultural income remains exempt from direct taxation, it will now be considered when determining the tax slab for non-agricultural income under the new tax regime. This decision has sparked various discussions around its implications and potential impacts.

Previously, individuals filed their agricultural and non-agricultural income separately. The proposed integration implies that while agricultural income itself remains untaxed, it will be clubbed with non-agricultural income to determine the applicable tax slab for the latter.

Individuals with significant non-agricultural income having salaries, business profits, and investments will likely face an increased tax liability if they also have substantial agricultural income. This is because their combined income will push them into higher tax brackets, leading to a higher tax rate on their non-agricultural income. Individuals with moderate non-agricultural income may also be impacted depending on the specific thresholds and calculation methods implemented. Those with a combined income exceeding the new thresholds could potentially be pushed into higher tax brackets.

Conditions for applicability

Partial integration typically applies only when two conditions are met:

• The individual’s non-agricultural income exceeds a certain threshold (e.g. the basic exemption limit for income tax).
  • The individual’s net agricultural income exceeds a specified amount (which may vary depending on the jurisdiction).

Calculation process

• The non-agricultural income and the net agricultural income (gross income minus specified deductions and exemptions) are combined.
  • Tax is calculated on this combined income as if it were the individual’s total income. This can potentially push the individual into a higher tax bracket for their non-agricultural income.
  • Tax is then calculated on the net agricultural income separately, considering any applicable exemptions or reduced rates.
  • The final tax liability is determined by subtracting the tax calculated on the separate agricultural income from the tax calculated on the combined income.

Example

For instance, A has chosen the concessional tax regime for FY 2024-25 and has earned agricultural income amounting to Rs. 2 Lakhs along with non-agricultural income of Rs. 9 Lakhs. The Tax liability applying the partial integration mechanism is shown in the table:

Potential benefits 

1. Increased Fairness in the Tax System:

• Addressing the “Tax Haven” Issue: Currently, individuals with high combined income can potentially minimize their tax burden by leveraging the exemption on agricultural income. This integration aims to address this by ensuring that these individuals, regardless of the source of their income, contribute their fair share to the system.
• Promoting Horizontal Equity: This principle emphasizes that taxpayers with similar overall income capacity should pay similar taxes, regardless of the income source. The integration strives to achieve this by considering both income streams when determining the tax liability.

2. Potential for Boosted Tax Revenue:

• Closing the Tax Gap: The government estimates that a significant amount of income, particularly from individuals with substantial agricultural income and high non-agricultural income, might be escaping taxation due to the current exemption. This integration has the potential to close this tax gap by bringing these individuals within the ambit of taxation, leading to increased revenue generation.
• Funding for Public Services: The additional revenue generated through this approach could be used to fund essential public services like education, healthcare, and infrastructure development, benefiting society as a whole.

3. Potential Simplification of Tax Filing Process:

• Reduced Administrative Burden: Currently, taxpayers need to file separate returns for agricultural and non-agricultural income, which can be time-consuming and complex. This integration could potentially eliminate the need for separate filing, simplifying the process for both taxpayers and the tax administration.
• Increased Transparency: By bringing both income streams under one tax umbrella, the financial situation of taxpayers becomes more transparent, potentially facilitating better policy formulation and financial planning.

Amendments for TCS Rates

The interim budget has proposed a retrospective amendment in existing provisions of Section 206C (1G) of the Income Tax Act to align it with Circular No. 10 of 2023 on TCS rates.

It has also introduced changes to Tax Collection at Source (TCS) rates. For the Liberalized Remittance Scheme (LRS), the earlier announced increase in TCS from 5% to 20% for remittances exceeding ₹7 lakh annually (excluding education and medical) remains valid. However, a crucial change offers some relief. A threshold exemption of ₹7 lakh is now available for all LRS categories, regardless of the purpose. This means individuals won’t pay TCS on the first ₹7 lakh they remit each year. Additionally, for education and medical remittances exceeding ₹7 lakh, a reduced TCS rate of 5% applies, with a further reduction to 0.5% if financed by an educational loan.

Furthermore, the budget introduced a new TCS system specifically for overseas tour packages. Unlike LRS, there’s no threshold exemption here. Individuals will pay a 5% TCS for packages costing up to ₹7 lakh and a higher 20% TCS for packages exceeding that amount.

Conclusion

The Interim Budget 2024, refrained from making any drastic changes and did not institute any reform per say as was done in the budget of 2019 but at the same time it has made significant taxation moves as discussed above. It has given the taxpayers the taste of vote with respect to minimum changes in direct taxation system. It has given high hopes of beneficial changes in the comprehensive Budget to be proposed post elections in July 2024.