From 97% to 42%: How tax charges for people modified

Income tax was first launched within the nation through the pre-Independence interval in 1860 by Sir James Wilson, a civil servant in British India. “The tax was launched as a short lived measure to satisfy the bills of the British authorities through the sepoy mutiny of 1857 (often known as the primary struggle of Indian independence). It was initially levied on a small proportion of the inhabitants,” said Tapati Ghose, partner at Deloitte.

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Graphic: Mint

Eventually, income tax became permanent and its scope expanded to include a larger portion of the population as the government looked for newer sources of income.

The year 1961 is said to have shaped the current tax system. Significant amendments in the rules gave birth to the Income Tax Act of 1961, which empowered authorities to levy, administrate, collect and recover income tax. In terms of tax rates, during 1973-74, India witnessed the highest marginal tax rate (including surcharge) of 97.75%. It was gradually brought down to 50% in 1991-92 and further slashed to 30% in the following years. Currently, it stands at 42.7%.

India, like many other countries, follows a progressive tax structure to levy tax. That is, the tax rate increases as the taxable amount increases. At present, we have four tax slabs under the old tax regime: There is no tax on income up to ₹2.5 lakh. Income of ₹2.5–5 lakh is taxed at 5% (with tax rebate), ₹5– 10 lakh at 20% and that above ₹10 lakh at 30%.

The above slab limits were mostly left unchanged in the last one decade, despite the rise in inflation in the country (see graphic). The government reduced the burden on those in the bottom of the pyramid, to an extent, by introducing tax rebate and standard deduction ( ₹50,000 for salaried).

However, those in the middle and higher income groups have more expectations from Budget 2023. They want a rejig of the maximum slab limits to match the current environment of rising income levels.

With inputs from Tapati Ghose, partner from Deloitte, we lay down the key events in the history of income tax with respect to changes in tax slabs and tax rates for individuals starting 1991 (see graphic), the beginning of a decade of economic reforms in the country. Note that we haven’t considered ‘deductions’ that are allowed from the taxable income for the purpose of this story.

Key events

Former finance minister P. Chidambaram, in his ‘dream budget’ in 1997, made several changes by replacing the then tax rates—15%, 30% and 40%— with new rates of 10%, 20% and 30%, respectively.

Introducing the new tax rates and brackets, Chidambaram said “I believe that a good tax policy should aim at moderate rates, a wider tax base, simpler procedural rules and securing greater compliance.”

It was once more Chidambaram who, in 2005, altered the tax brackets in a big manner. In that finances, he launched a separate exemption restrict for ladies at ₹1.25 lakh ( ₹1 lakh for the odd taxpayer) which isn’t there anymore. Further, in 2008, he raised the minimal and most limits to ₹1.5 lakh and ₹5 lakh respectively. Thereafter, a serious change within the private earnings tax in India was witnessed solely in 2017-2018, when the then finance minister, Arun Jaitley, slashed the minimal tax price to five% from 10% for these within the tax bracket of ₹2.5 lakh to ₹5 lakh.

In Budget 2020, present finance minister Nirmala Sitharaman launched the brand new tax regime (7 slabs), which provides low tax charges however with out the advantage of most deductions and exemptions.

Currently, people incomes as much as ₹2.5 lakh each year should not have to pay any taxes. Further, taxable earnings as much as ₹5 lakh is tax-free as a result of rebate supplied by Section 87A. The most tax bracket with restrict of ₹10 lakh (taxed at 30%) has been left unchanged since 2012. The improve within the middle-class inhabitants in India in the previous couple of years makes a powerful case for the revision of this restrict, in accordance with specialists.

Surcharge: on and off

In the previous, a surcharge (tax on tax) on direct taxes was usually levied to satisfy the income wants arising from pure calamities. In the Nineties, it was levied solely when there was a particular income requirement for the centre.

In 2000, then finance minister Yashwant Sinha determined to rise the surcharge tax from 10% to fifteen% to satisfy the “heavy and surprising expenditure burden” for defence requirements on the back of the Kargil war. “I trust that the relatively better-off sections of society would bear this additional burden cheerfully,” he added in his Budget speech.

In 2001, he eliminated the surcharge besides 2% on all tax payers (incomes greater than ₹60,000) for the Gujarat Earthquake aid.

Following that, surcharge was eliminated and reintroduced with totally different thresholds in varied budgets. Since 2013—when Chidambaram launched 10% surcharge on earnings exceeding ₹1 crore—the levy has develop into everlasting in India.

At current, the surcharge price is 10% of the tax quantity for earnings of ₹50 lakh and above however not exceeding ₹1 crore. For earnings above ₹1 crore however not exceeding ₹2 crore, it’s levied at 15%. The tax goes as much as 25% if the earnings exceeds ₹2 crore however not ₹5 crore. For earnings exceeding ₹5 crore, surcharge is as excessive as 37% of the tax quantity. This pushes the very best marginal tax price (together with surcharge) to 42.74%, which is the very best within the final three a long time.

The surcharge is along with the levy of training cess, which was launched in India in 2004 at 2%. It is now referred to as ‘health and education cess’ charged at 4% on the quantity of tax plus surcharge.

Technology push

The historical past of earnings tax in India could be incomplete with out the point out of the division’s transfer in direction of technology-based processing of returns within the final 20 years.

From Saral varieties within the early 2000s for submitting I-T returns electronically, the earnings tax division in India now has a system of end-to-end on-line preparation and e-filing of earnings tax returns, e-payment of taxes and refunds straight in taxpayers’ financial institution accounts all through the nation.

To additional ease the tax submitting course of, the division has come out with pre-filled tax returns which has particulars together with wage earnings, capital beneficial properties from securities, financial institution pursuits, dividends and tax deductions.

In phrases of assessments, we now have e-assessment of tax returns and a faceless enchantment system. The authorities laid the groundwork for the National Faceless Income Tax Appellate Tribunal Centre, a quasi-judicial authority to file appeals towards the orders of the authorities within the appeals division.

The earnings tax system has actually come a good distance in India however must go additional when it comes to having tax brackets that account for inflation and a gradual tax regime within the long-run.

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