Individual taxpayers are waiting with bated breath for the first budget of Nirmala Sitharaman as India’s finance minister. India reported lowest quarterly GDP growth in Q4 2018-19.
The country has lost the tag of fastest growing economy in the world. Growth in private consumption expenditure is witnessing a decline. Consumer confidence, too, declined in May 2019 due to deterioration in sentiments on jobs, price levels and the economy, according to an RBI Survey.
So, the mood is not that good.
In the interim budget, then finance minister Arun Jaitley had proposed a slew of tax breaks for individuals to provide some relief:
Increase in exemption limit from Rs 2.5 lakh to Rs 5 lakh p.a.
Increase in standard deduction from Rs 40,000 p.a. to Rs 50,000 p.a.
Increase in deduction of deemed rent from 1 to 2 houses not let out by assessee.
People hope these proposals will be continued with despite the headwinds facing the economy and the pressure to maintain fiscal deficit targets. However, the tax proposals have resulted in lop-sided tax slabs as listed below. We don’t have a 10% tax slab and effectively tax rates start at 20% straight away.
* Effective tax rate: Rebate of 100% of tax payable will be provided under Section 87A, subject to a maximum of Rs 12,500 per assessee. That makes any taxable income up to Rs 5 lakh entirely tax free.
We have less number of slabs and rates
Although, technically there is a 5% tax slab, now with interim budget provisions, income up to Rs 5 lakh would not attract any tax liability. The tax slab of Rs 5 lakh to Rs 10 lakh per annum draws a tax rate of 20% which is very high.
While we have just 4 tax slabs and rates, the United States, South Africa and China have 7 each, Russia has one flat rate, while Singapore has 11.
Our peak tax rate starts very early
Not only do we have fewer tax slabs and rates, our highest tax rate of 30% kicks in at much lower income levels (>10 lakh) compared to global rates.
In China, 30% tax rate is applicable on income above Rs 42 lakh (>4x). In Russia, all income is taxed at 13% (less than half our peak rate). In the US, income above Rs 10 lakh and up to Rs 27.5 lakh is taxed at just 12% (one-third our peak rate).
In Singapore, the first Rs 10 lakh income is exempt from tax while the highest slab attracts a tax rate of 22%. In South Africa, 31% tax rate is applicable on income of about Rs 15 lakh and above.
Note: Russia has flat tax rate, other countries have rates which increase gradually with income slabs.
For income below Rs 5 lakh per annum, the US, China and Russia levy higher taxes than India. For incomes above Rs 5 lakh, India levies higher taxes than the 4 countries mentioned above in the table. Additionally, these countries provide free/subsidized education and hospitalisation, social security, et cetera, which is not the case in India.
Change in tax slabs needed to correct anomaly
Our tax rates effectively start at 20%, with lower incomes being charged at higher rates. This anomaly needs to be corrected and it should gradually increase to the highest tax slab rate of 30%.
We could have tax rates of 0% (Rs 0-5 lakh pa), 5% (Rs 5-10 lakh pa), 10% (Rs 10-15 lakh pa), 15% (Rs 15-20 lakh pa), 20% (Rs 20-25 lakh pa), 25% (Rs 25-30 lakh pa), 30% (30-35 lakhs pa) and 35% (>Rs 35 lakh pa). This way we will have 8 tax slabs and rates, similar to the US and China. It will also establish some sort of global parity.
A change in tax slab rates will increase the take home salary of salaried individuals and leave more money in the hands of professionals.
Salaries in India have been witnessing a decreasing pattern in the year-on-year increase as per Willis Towers Watson report. Further, GST has led to an increase in service tax rate from 15% to 18% increasing the cost of services like telecom, insurance, travel, et cetera.
Change in tax slabs will compensate partly for an increase in cost of services and low salary hikes.
Individuals have been complaining about lack of parity with corporates for a long time. Corporates pay tax on profits not income, after deducting expenditure (no ceiling) from income. Individuals pay tax on income. In the last budget, standard deduction was re-introduced, but it is only Rs 50,000 per annum. A person living in a metro is spending roughly this amount only on transport / conveyance yearly.
Corporates with sales of less than Rs 50 crore and making profits of 1% for example, i.e., Rs 50 lakh, have to pay tax at the rate of 25%. Contrast this to individuals, people individuals have to pay tax at the rate of 30% on income above Rs 10 lakh.
A slowdown in GDP coupled with uncertain global cues, US-China trade war and tepid monsoon project a tough road ahead for the Indian economy. Changes in tax slabs and a more balanced and gradual increase in tax rates with income levels will help individuals sail through these challenging times.
(The author is a former corporate and investment banker turned political commentator, consultant, and strategist. He can be reached @politicalbaaba.)