Every year, taxpayers have a lot of expectation from the budget. Employed and self-employed individuals constitute a large percentage of the overall tax-compliant population. India has seen a reduction in overall tax rates over the past few decades which, in turn, has resulted in increased compliance and more revenue for the government.
Due to the global economic slowdown, there has been increased pressure on the average household income and expenditure. Therefore, there is a general expectation of some relief from tax this year.
Economic matters: People at a shopping mall in Noida. Top tax rates in all the Bric economies have remained unchanged during 2003-2008. Harikrishna Katragadda / Mint
Rationalization of tax slab rates and reduction of tax is a fundamental issue and not just restricted to the current year’s budget. In this context, three points merit attention: revising the slab rates upwards; reducing the number of rates, currently three; and reduction in the peak tax rate.
It would be prudent to look at the global landscape as to how personal tax rates have evolved over years, before a case could be argued for rationalization in India.
In general, there is a slow global decline in top personal income-tax rate from an average of 31.3% in 2003 to 28.8% in 2008. However, specific regional and country-level analysis varies considerably and needs to be factored in, before building any scenario.
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The highest personal income taxes in the world are payable by the citizens of the European Union. Also, there has been steepest fall in the average tax rate from 41.5% in 2003 to 36.4% in 2008 in this region. A few notable examples include France, which made a significant cut from 48.1% in 2003 to 40% in 2008, and Germany, which reduced the top tax rate from 48.5% to 45% during this period.
A significant development in the last few years has been the introduction of a flat tax rate in Europe. The flat rate introduced in few European countries is at a much lower level than the highest variable rate, thereby reducing the overall tax impact for the individuals.
So far, many eastern European states have moved forward in this direction. These include Estonia, where rates have fallen from 26% in 2003 to a flat rate of tax of 21% in 2008, Slovakia from 38% to 19% and Romania from 40% to 16%. Also, two noteworthy examples of flat rate structure are the Czech Republic, with a flat tax rate of 15%, and Bulgaria with a flat tax rate of 10%.
Among the highest individual taxpayers on certain types of income include people in Denmark, where the top tax rate is 59%, followed by Sweden at 55% and the Netherlands at 52%.