One big expectation of the common man, especially the taxpayers, from the Budget 2021 announcements to be made by Finance Minister Nirmala Sitharaman will be no introduction of any new tax. However, the talk of a Covid tax in the form of Covid Cess is making the rounds, which if introduced will increase the tax outgo for the taxpayers.
“Considering the government’s proposal for a free vaccination, there is a likelihood that it will introduce 1 per cent Covid cess in the Budget 2021, in addition to the existing education cess. Covid cess is likely to be applicable to all taxpayers equally,” says Nikhil Thakkar, Senior Vice President, IIFL Wealth.
Currently, ‘Health and Education Cess’ is levied at the rate of four per cent of income tax, including surcharge wherever applicable. The amount of tax as increased by the surcharge if applicable so arrived at shall be increased by Health and Education Cess at the rate of 4 per cent to arrive at the total tax payable.
But, how likely is it that the government may announce the Covid Cess? “There was a big revenue loss for the government because of the Covid and the world’s largest vaccination drive is on. Many sectors are looking for relief in the budget and even individual tax-payers are not too well off. The government is in dire need of funds. Buoyancy in tax collections, disinvestment, and borrowings are expected to be the major sources from where the government may raise funds. In such a scenario, the possibility of the government introducing the Covid cess as also an additional levy on fuel cannot be neglected,” says Col Sanjeev Govila (Retd), a SEBI Registered Investment Advisor (RIA), and CEO, Hum Fauji Initiatives, a financial planning firm which caters exclusively to armed forces officers and their families.
If a Covid Cess is introduced, there will be an additional tax outgo depending on one’s net taxable income. For example, for someone with a taxable income of Rs 7 lakh and Rs 15 lakh and opting for the new simplified tax regime, the additional tax outgo will be approximately Rs 325 and Rs 1875 respectively.
“To strike a balance, in case the government introduces Covid cess for a year to finance deficits etc. the below table reflects the impact for individuals with a taxable income of Rs 7 lakh and Rs 15 lakh. The impact may vary basis the level of income, senior citizen status and option availed under alternate tax regime under section 115BAC,” says Tapati Ghose, Partner, Deloitte India.
The paying additional tax may impact the budget of common taxpayers. “It will not be appropriate to introduce COVID CESS in the budget as it will affect the masses and people at the ground are still struggling to come out of the woes of COVID impact,” feels Rajesh Bansal, Managing Director, Midas FinServe Pvt. Ltd, a financial services firm.
According to Thakkar, the additional tax outgo for those in various other income slabs will be as under:
Could taxpayers see a Covid-19 cess or surcharge this Budget? Jiger Saiya, Partner and Leader – Tax & Regulatory Services, BDO India says, “The answer would hinge on how the government plans to fund the fiscal deficit created by the stimulus and the budgeted spend on vaccination drive. However, between a cess and a surcharge, a progressive surcharge could be a better option, as it will not put an equal burden on small taxpayers.”
Col Govila (Retd) also feels the same, “It is widely expected that such a cess would be levied only on super-rich taxpayers or at the most, on high-income earners. The chances of it being levied on all the taxpayers seem very low considering that the lower-income taxpayers have been more affected by the pandemic than others.”