Understanding Income and Wealth Taxes in India
Introduction:
As we navigate the intricate landscape of financial matters, one topic that often takes center stage is taxes. In the vibrant tapestry of India’s economic structure, taxes on income and wealth play a pivotal role. Let’s embark on a journey to demystify these taxes, shedding light on their nuances and implications.
Table of Contents
Income Tax in India:
Understanding the Basics:
Income tax is the financial contribution individuals make to the government based on their earnings. In India, the Income Tax Act governs these taxes. The income can be derived from various sources, including salaries, business profits, capital gains, and more.
Tax Slabs and Rates:
India’s income tax system is progressive, meaning the tax rate increases as the income rises. The country follows a slab system, where different income ranges are taxed at different rates. Individuals falling within the lower income brackets benefit from lower tax rates, ensuring a more equitable distribution of the tax burden.
Deductions and Exemptions:
The Income Tax Act provides a plethora of deductions and exemptions, allowing taxpayers to reduce their taxable income. Investments in instruments like Provident Funds, National Savings Certificates, and life insurance premiums can be claimed as deductions. Additionally, expenses such as medical insurance premiums and education loans qualify for exemptions.
Wealth Tax in India:
Wealth Tax: A Relic of the Past:
Wealth tax, once a part of India’s tax landscape, was abolished in 2015. The tax was levied on individuals with substantial assets, including real estate, jewelry, and luxury cars. While wealth tax aimed to address economic inequality, it faced challenges in implementation and was eventually replaced by a surcharge on high-income individuals.
Current Scenario:
Although wealth tax is no longer in force, the government still keeps a keen eye on high-net-worth individuals. The focus has shifted to a comprehensive approach, encompassing income tax on earnings and capital gains on investments. This shift ensures that individuals contribute to the nation’s development based on their overall financial picture.
Challenges and Reforms:
Tax Evasion:
Tax evasion remains a challenge in India, with some individuals finding ways to underreport income or engage in illicit financial activities. The government continuously introduces measures to curb evasion, leveraging technology and data analytics to identify discrepancies.
Simplifying the Taxation System:
Recognizing the complexities of the tax system, the government has taken steps to simplify procedures. The introduction of the Goods and Services Tax (GST) is a prime example, unifying indirect taxes and streamlining the taxation process for businesses.
Digital Transformation:
Embracing the digital era, the Income Tax Department has implemented online filing systems and electronic verification processes, making it more convenient for taxpayers. This shift towards digitization not only reduces paperwork but also enhances transparency in tax transactions.
Conclusion:
In the symphony of India’s economic orchestration, taxes on income and wealth play integral roles. The progressive income tax system ensures a fair distribution of the tax burden, while reforms and digital advancements strive to simplify the process for taxpayers.
As we navigate this intricate maze of financial obligations, it’s crucial to stay informed and compliant. Whether it’s understanding the nuances of income tax or recognizing the evolution of wealth tax, a well-informed citizenry contributes to the nation’s progress. So, let’s embrace financial literacy, demystify the complexities, and pave the way for a more prosperous India.
The Central government levies a number of taxes on income and wealth of which (from the point of view of the revenue proceeds) only personal income tax and corporation tax are important.
Personal Income Tax
Personal income tax is levied on the incomes of individuals, Hindu families, unregistered firms and other associations of people. For taxation purpose income from all sources is added. However, apart from the deduction of necessary professional expenditures, rebate on account of life Insurance premium, provident fund, etc., was earlier allowed. This rebate was, although, abolished in the Budget for 2005-06.
Like all other countries, India has a progressive income tax. Before 1974-75, the marginal rate for income tax in this country was 97.75 per cent which was the highest in the world. On the recommendation of the Direct Taxes Enquiry Committee the marginal rate for income tax was brought down to 77 per cent which was subsequently reduced to 50 per cent as part of long-term fiscal strategy. The marginal rate for income tax was brought down to 40 per cent in the budget for 1992-93, and further to 30 per cent in the budget for 1997-98. The tax rates have been reduced at other levels also.
Thus, the degree of the progressivity of the schedule has been considerably reduced. Reduction in tax rates at all levels has been by and large commended in the country. Extraordinarily high tax rates in the past were highly unrealistic. They failed to reduce economic disparities. On the contrary, they put a high premium on tax evasion and, in practice, became a major factor in the growth of black money.
The Chelliah Committee had also favoured significant reductions in tax rates at all levels. This approach seems to be influenced by the Laffer Effect which implies that a reduction in the rate of taxation leads to more than proportionate increase in tax yield. In India, income tax also lacks built -inflexibility. Thus, its effectiveness as a tool of economic management is rather limited. Income tax in its existing form is essentially a means to collect revenue and as a fiscal instrument its relevance is limited.
Corporation Tax
Corporation tax is levied on the incomes of registered companies and corporations. The rationale for the corporation tax is that a joint stock company has a separate entity, and thus a separate tax different from personal income tax has to be levied on its income. Until 1960-61, corporations were taxed in a partial sense. A corporation was required to pay income tax on behalf of its shareholders on dividend paid to them, and each shareholder got a credit to this effect. Since 1960-61, corporations are being treated as independent entities and shareholders are no longer allowed any credit against their individual tax liabilities.
The Budget for 1997-98 reduced the rate of corporation tax to 35 per cent. In the Budget for 2005-06, the corporate tax rate was reduced from 35 to 30 per cent. While presenting Union Budget for the year 2015-16, the Finance Minister proposed to reduce the corporate tax rate from 30 per cent to 25 per cent over a period, accompanied by rationalisation and removal of various tax exemptions and incentives.
In the Union Budget 2017-18, the Finance Minister reduced the corporate tax to 25 per cent for medium and small enterprises with annual turnover of less than ₹ 50 crore. In the Union Budget 2018-19, this benefit was extended to companies with a turnover upto ₹ 250 crore. With this extension, almost 99 per cent of companies which file returns are now in the 25 per cent slab. Only about 7,000 companies out of about 7 lakh companies which file returns of income, now remain in the 30 per cent slab.
The Chelliah Committee recommended elimination of most of the incentives except those meant for promoting savings and exports.
