Indian scenario:
India follows the progressive tax slab rate system for individual taxpayers, where the tax rate is determined based on varied factors:
a) Age groups: Normal taxpayers (age below 60 years), Senior citizens (age above 60 years but below 80 years) and Super senior citizens (age above 80 years) where senior people enjoy a higher basic exemption level for income chargeable to tax.
b) Different levels of income of the individual where high income-earners are subject to higher tax rates.
c) Further, a surcharge is applicable on tax depending on the income level.
d) Additionally, the Health and Education Cess @ 4% is levied on the tax plus surcharge.
e) There are also two tax regimes applicable to individuals which are the Existing Tax Regime and the Concessional Tax Regime. In the case of the Concessional Tax Regime, certain deductions/exemptions have to be foregone by the individual and hence, comparatively lower tax rates are applicable.
The above is summarised in the table below:
The maximum marginal tax rate for an individual earning taxable income (excluding capital gains) of more than INR 50mn is 42.744% (i.e., 30% tax rate + 37% surcharge + 4% cess). This is a substantially high rate of tax.
Union Budget 2014-15 raised the basic exemption limit from INR 200,000 to INR 250,000. This was also the same year when the deduction limit under section 80C of the Income-tax Act, 1961 (the Act) was raised from INR 100,000 to INR 150,000. Section 80C of the Act allows a deduction for several expenses/investments such as Employee Provident Fund contributions, tuition fees for children, life insurance premium payments, etc. which are basic and quite popular among individual taxpayers. Hence, a substantial period has lapsed since the basic exemption limits and section 80C deduction limits have been re-assessed.
Even the notified Cost Inflation Index (CII) has also gone up from 240 (FY 2014-15) to 331 (FY 2022-23). The CII is a means to measure inflation over the years and is used for capital gain taxation.
Global scenario
Taxes are a very important factor in a country’s development. This enables a country to lay down their economic spends on infrastructure, health and education of their citizens. There are several factors that help countries develop an efficient tax system – such as population size and composition, Gross Domestic Product (GDP) ratio, macro-economic policies, administrative considerations, inflation rates, etc.
While some countries follow a flat tax-rate system, most countries such as the USA, Canada, Japan, etc. follow a progressive tax slab rate system. The tax rates are also different based on residency, marital status, source of income, etc. While the Middle East countries do not have personal income tax, other countries have it in the range of 10% to 60%.
Below is a glimpse of the personal income tax rates around the world:
India 42.74%
Canada 33%
US 37%
France 45%
Finland 56.95%
Germany 45%
UK 45%
China 45%
Hong Kong 15%
Japan 55.97%
Singapore 22%
Australia 45%
(These are indicative rates and may vary depending on the facts of each case)
The maximum tax rate in India is almost at par with other countries across the world. However, the basic exemption limits, deductions, rebates, etc., vary for each country.
The brunt of personal tax rates is a direct cost hit to an individual’s income. Reduction of personal taxes helps to increase the purchasing power of individual taxpayers.
With the comparative higher inflation rates over the years, it would be apropos to increase the basic exemption limits in the upcoming Budget to bring the much-needed tax sop to individual taxpayers.
Author: Deepashree Shetty, Associate Partner - Tax and Regulatory Services, BDO India
