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Income tax rates moderate in India, shows internal analysis by finance ministry
February, 29th 2016

India is seen to have lower tax rates than several other countries, an internal analysis by the finance ministry has shown. It has also pointed to the country's low tax-GDP ratio, something which may not cheer those who are looking forward to tax relief in Finance minister Arun Jaitley's third budget to be presented on Monday.

For instance India's tax to GDP ratio is at 16.7%, well below China's 19.4% and USA's 25.4%. France has a tax to GDP ratio of 45% while Denmark as is pegged at 48.6%, data available with the finance ministry showed. India's taxGDP ratio is closer to the levels in Ghana (16.1%) and Tanzania (16.8%).

Among the BRIC countries, Brazil has a tax to GDP ratio of 33.4% while Russia is at 34.8%. But experts say that most developed countries have a higher per capita income and therefore the ability to pay higher taxes.

In terms of tax rates the lowest individual tax rate in India is 0%, in China it is 5% and in the United States it is 0-3%. In the United Kingdom it is pegged at between 0-20%.

The highest individual tax rate in India is at 34.6%, China it is 45%, US at 39.6 and in some brackets 55.9% and in the UK it is 45%. The inheritance/estate tax rate in India is 0%, similar in China but 40% in the United States and 40% in the UK. In Australia the rate is 45% while in Austria and Belgium it is at 50%.

There are several exemption which come into play in India but still there is an overwhelming view that personal income tax rates are very high.

The VAT, Goods & Services Tax and sales tax rates in India varies between 5.5 and 14.5%, China it is 17%, US between 0 and 11.73% and in the United Kingdom at 20%.

"On personal income tax, the burden is not very high. But when it comes to corporation tax, overall incidence is quite high if you factor in things like dividend distribution tax," a senior government officials said.

The corporate tax rate in India is at 30%, China 25%, US 35% and in some cases 47% while in the UK it is 20%. Jaitley has unveiled a plan to cut tax rates to 25% from 30% over the next four years. The FM had said that the basic rate of Corporate Tax in India at 30% is higher than the rates prevalent in the other major Asian economies, making the country's domestic industry uncompetitive.

The plan to reduce the corporate tax rate is aimed at higher level of investment, higher growth and more jobs. But Jaitley had said that the process of reduction has to be accompanied by rationalisation and removal of various kinds of tax exemptions and incentives for corporate taxpayers, which incidentally account for a large number of tax disputes.

On Friday, the Economic Survey had argued for increasing the base of taxpayers by suggesting that the government should refrain from increasing the exemption limit and also rework tax benefits on savings schemes such as the public provident fund.

The suggestion came amid a pitch from banks and RBI to increase the Rs 1.5 lakh tax exemption limit under section 80C of the I-T Act. The benefits are available for several insturments such as life insurance, certain fixed deposits, small savings schemes such as PPF and National Savings Certificate as well as provident fund contribution. Bank and RBI have sought more benefits to boost the savings rate in the economy.

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