Income tax blues: Most enter top tax bracket due to inflation, not rise in real income : 03-06-2019

It was in Budget FY13 that the income tax slab for the marginal rate of 30% was moved from 8 lakh to10 lakh. Over the six years since then, the value of money has eroded considerably — 10 lakh in the beginning of FY13 was equivalent to15 lakh at the end of FY19 due to inflation —, but the highest tax bracket remained unchanged, causing sections of the taxpayers in the top slab to increasingly feel the tax pinch.

This also explains the flat growth in share of the taxable income reported by those in the 30% tax bracket over the years — this has remained at around 35%.

With inflation pushing wages and salaries, the number of taxpayers in the top slab grew over 100% to 34 lakh in assessment year 2017-18 from about 17 lakh in AY2013-14, while overall taxpayer base expanded only 40%. Most of the increase in the number of assessess in the highest tax bracket is attributable to the taxpayers who show ‘returned income’ of 10-20 lakh (the number of people showing income above20 lakh has remained stagnant during the period). So it is not increase in real income but inflation that pushed most of new entrants into the top bracket.

Clearly, by allowing the highest tax rate to kick in so early, the governments have compromised on the principle of using modest tax rates to improve tax buoyancy. Successive governments have been wary of raising the threshold for the top tax bracket because they found it politically difficult to expand the tax net by bringing segments, including the unorganised sector, into it.

For policymakers it was much easier to extract taxes from those in the net like the salaried class and others in the TDS ambit than widen the net. What India is experiencing is, therefore, ‘bracket creep’, where a tax system is not duly adjusted for inflation.

According to analysts, the situation is unlikely to change soon as the growth in tax collections has lately slowed after a temporary blip following demonetisation.

“There is certainly a case for raising the tax thresholds but the government is mindful of its impact on tax collections. The taxpayer contribution can be best described as an inverted triangle. Large number of taxpayers pay very little and a handful pay more than 95%,” Sanjay Kumar, senior director at Deloitte India, said.

He added that the raising the for lowest tax bracket is a standard practice across the world. Normally, countries do the adjustment for the lower tax thresholds first and then adjust (the slabs), keeping in view the tax progressivity aspect, for other income levels, Kumar said.

Source : Economic Times

error: Content is protected !!