Budget being round the corner, the so called 'Aam Admi' would be curious to know if there will be any increase in their disposable income. Every year there is a general expectation from the individual tax payers on the budget proposals relating to personal taxation, especially on the tax rates/tax slabs. This expectation is further heightened this time due to the impact of global economic slowdown directly or indirectly impacting the growth in India and inflationary trends in the domestic market.
Let us first look at the change in tax slabs over the last 5 years. As seen above, the exemption threshold has been increased over the years. One needs to keep in mind that Indian tax laws do not provide any major deduction (other than a threshold of Rs 1,00,000 & mediclaim) for expenditure to salaried tax payers and all income above the threshold limit is liable to tax. The budget 2012-13 may bring some cheer to the Aam Admi as the government is said to be considering restructuring of income tax slabs as well as the income tax exemption limit.
According to various media reports, the new tax slabs could be in line with the Direct Taxes Code (DTC) Bill. As per the DTC, income between Rs 2,00,000 and Rs 5,00,000 per annum will be taxed at 10%, income between Rs 5,00,000 and Rs 10,00,000 will be taxed at 20% and income above Rs 10,00,000 will be taxed at 30%. These rates are nowhere close to the tax rates suggested by the first draft of DTC. The first DTC draft suggested 10% tax on income from Rs 1,60,000 to Rs 10,00,000 and 20% tax rate between Rs 10,00,000 and Rs 25,00,000 and 30% tax rate on income above Rs 25,00,000.
An increase in the basic exemption limit to Rs 2,00,000 for individuals below 65 years of age vis-a-vis the current limit of Rs 1,80,000 would be a welcome change.
Currently, the highest tax rate of 30% is applicable to income above Rs 8,00,000 per year. This limit could be enhanced to Rs 10,00,000, thereby resulting in some savings and also aligning the slabs with the proposed DTC.
For easy reference, a comparison of the current tax rates and the tax rates under the proposed DTC is laid out below: Despite the rejig, the taxes paid in India by individuals are still among the highest in the world. As per the recent media news, the Indian companies during their customary pre-budget meeting advised the finance ministry to retain the tax rates at existing levels but increase exemption limits to promote growth or consumer spending. A rejig in the tax rates as well as the tax slabs may encourage higher tax compliance by individuals.
As India steadily progresses with the economic transition from a developing to a developed country, realignment of tax laws in line with such developments become priority for effective growth