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Budget 2017: Do we expect an overhaul of personal income tax rates and slabs?
January, 16th 2017

Akin to every year, there are many expectations from Budget 2017, especially on the personal income tax rate aspect. This has become a much-discussed subject for this year’s Budget - the other one is demonetisation.

The present Government’s objective of having globally competitive tax rates has been pointing in this direction. To add to the same, in a recent speech, the Finance Minister (FM) stated that the direct and indirect tax collection figures for the period April 2016 to December 2016 have shown a positive trend. As per the recent press release1, the collection of direct taxes has grown by 12.01 per cent and indirect taxes by 25 per cent over the corresponding period last year, i.e. April 2015 to December 2015. More important, the personal income tax collection has increased by 21.7 per cent.

This has further given a ray of hope for the common man’s expectation of re-alignment of income tax slab and rates.

In this backdrop, let us look at the key expectations from the FM on this front:

Increase in basic income exemption limit:

A vital expectation of the common man from the FM is to increase the individual tax exemption limit currently at INR 2,50,000 per annum, which has remained constant for the past three years.

It is also interesting to study international trends in this regard. For example, countries such as the United Kingdom follow the change (increase) in basic exemption limit (personal allowances) on a yearly basis.

The table below shows the current basic income exemption threshold of Germany and the United Kingdom:

The above basic exemption limit in overseas jurisdiction is much higher as compared to our current basic exemption limit. Hence, there is widespread expectation that the basic income tax exemption limit may be increased to at least INR 300,000 per annum.

Further, the existing income tax exemption limit of INR 300,000 p.a. for senior citizens (60 years to less than 80 years) and INR 500,000 p.a. for very senior citizens (80 years and above) could be enhanced to INR 350,000 p.a. and INR 5,50,000 p.a. respectively.

Increase in income threshold on which peak tax rate should be applied

At present, the peak tax rate in India of 30 per cent is applicable over an income of INR 10 lakh p.a. for individual taxpayers. The income threshold was last
increased in the FY2012-13. Since then it has remained unchanged.

On a comparison of income threshold and peak rate of a few countries (listed below), it is observed that the income threshold considered for peak rate as well as the maximum tax rate in India is on the higher side.

Also, the general theory for taxation is that lower the tax rate, the higher is the rate of compliance. Considering this theory and the international trends, there is
also an anticipation that the government will raise the income level on which the peak tax rate may trigger.

Realignment of income tax slabs

As a result of the above-mentioned points, the expected tax rates that would be a wish list are as below:

The consequential increase in net disposable income could boost consumer spending or increase household savings being channelised for long term infrastructure or other long term funding requirements. At the same time, one would also need to assess the impact of this on the revenue collection for the government and resultant impact on the fiscal deficit.

The expectations and wish lists on personal taxes can be unlimited for any individual taxpayer. However, it will be interesting to see how the FM balances the fiscal objectives with the expectations of the common man on 1 February 17.

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