It is that time of the year again when the common man waits in anticipation for the finance minister ('FM') to announce the annual budget. Even as the FM tries to juggle many hats and get the balancing act right i.e. managing expectations of common man, inflation, fiscal deficit, the common always feels that the tax rates are very high.
However, going by the history of the evolution of personal tax regime in India, a different picture emerges. The tax rates have come down considerably over the years, indicating that reality and perception are poles apart. As we try to bring in front some of the key personal tax reforms that the country has witnessed, it becomes clear that Indian personal tax regime is indeed a good one.
Evolution of Tax System in India
The systematic attempt to evolve a tax system in independent India started with implementation of the report of Taxation Enquiry Commission in India in 1953. But the personal income tax rates were extraordinarily high during the decades of 1950-80.
In 1970-71, the personal income tax had 11 tax brackets with the tax rates progressively rising from 10 per cent to 85 per cent. When the surcharge of 10 per cent was taken into account, the maximum marginal rate for individuals was a mind boggling 93.50 per cent In 1973-74 the highest tax rate applicable to an individual could have gone up to an astronomical level of 97.50 per cent!
The Direct Taxes Enquiry Committee, 1971 attributed the large scale tax evasion to the exorbitant tax rates and recommended reduction in the marginal tax rate to 70 per cent. This change was implemented in 1974-75, when the marginal rate was brought down to 77 per cent, including 10 per cent surcharge. In 1976-77, the marginal rate was further reduced to 66 per cent. A major simplification and rationalization initiative came in 1985-86, when the number of tax brackets were reduced from eight to four and the highest marginal rate was brought down to 50 per cent.
Liberalisation of Personal Income Taxation
The last wave of reform in personal income taxation was initiated on the basis of the recommendation of the Tax Reform Committee, 1991. The tax rates were considerably simplified to have only three tax brackets of 20, 30 and 40 per cent in 1992-93. Further reductions came in 1997-98, when the three rates were brought down to 10, 20 and 30 per cent.
Personal income tax rates have remained stable since then, with some changes in the tax slabs.
Change in slabs over the last 10 years
Budget 2004 did not raise the exemption limit but provided that those with incomes under Rs 1,00,000 need not to pay any tax. Further, all taxes were
topped up by a two per cent education cess, a surcharge dedicated to education cess fund from 2004-05 onwards.
Budget 2005 increased the exemption limit to Rs 1,35,000 for women and to Rs 1,85,000 for senior citizens. The maximum marginal rate of 30 percent was applicable for income above Rs 250,000.
The 2006 budget did not bring in any changes in the rates of personal taxation or the tax slabs.
In the 2007 budget, threshold limit of exemption for all the assessees was increased by Rs 10,000, thus giving every assessee a relief of Rs 1,000. An additional cess of 1 percent on all the taxes was levied to fund secondary education and higher education, taking the total education cess to three per cent.
The 2008 budget further increased the basic exemption limit for women tax payers to Rs 180,000 and for senior citizens the limit was increased to Rs. 225,000. The exemption limit was increased to Rs 1,50,000 for all other categories of individual taxpayers. Surcharge of 10 percent was applicable for income exceeds Rs 10,00,000.
Budget 2009 raised the threshold limit of exemption from Rs 1,80,000 to Rs 1,90,000 for women tax payers, from Rs 2,25,000 to Rs 2,40,000 for senior citizens; and from Rs. 1,50,000 to Rs 1,60,000 for all other categories of individual taxpayers. The maximum marginal tax rate of 30 per cent was applicable to income above Rs 500,000. Surcharge of 10 per cent was eliminated on personal income tax.
Budget 2010 further liberalised the tax slabs. The 20 percent rate was made applicable to income above Rs 500,000 and the maximum marginal rate of 30 percent was levied on income above Rs 8,00,000.
As seen above, the personal income tax rates have steadily declined in India, with the maximum marginal rate of income tax coming down from a mind boggling 97.5 per cent to a much more manageable 30.9 per cent. Also, the slabs at which the various tax rates are applicable have been considerable widened over the years.
The inflation is on the higher side and a common man is struggling to manage his household budget and expects additional tax relief. While a further reduction in tax rates may not completely solve the common man's problems, it will certainly go a long way in putting some much needed extra cash in his hand so that he is able to manage his household budget.
-By Vineet Agarwal Director, Tax and Regulatory Services, KPMG