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.
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.
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
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%.
After the Europeans, in general, the highest tax is paid by people in the Asia-Pacific. Also, there has been a general decline in tax rates from 36.4% in 2003 to 34.6% in 2008 in this region. Incidentally, the big emerging economies of China and India have not seen a significant change in the tax rates over this period, whereas other emerging economies have reduced their top tax rates. For example, Vietnam has reduced its top tax rate from 50% in 2003 to 40% in 2008.
In India, the highest tax rate is 30%, and with a surcharge of 10% and education cess of 3%, it effectively works out to 33.99%.
A few striking examples in the Asia-Pacific include countries such as Hong Kong, with a tax rate of 16% since 2003 and Singapore with a tax rate of 20% since 2006. The highest rate of tax in this region is charged by Japan at 50%, followed by Australia and China at 45% on income above certain threshold.
The personal income-tax rate in Latin America has stayed low but relatively stable, averaging at 25.6% in 2003 and rising to 26.9% in 2008. This was mainly due to introduction of individual income tax in 2007 in Paraguay at 10% and in Uruguay at 25%. Thus, the tax rates have remained stable in Latin America or are being reduced. For example, in Panama, tax rates have been reduced from 33% in 2003 to 22% in 2008 and in Mexico from 34% to 28% during the same period.
In 2008, among the Bric (Brazil, Russia, India and China) countries, Russia took the lead with lowest individual tax rate. It levied a flat tax rate of 13%, while Brazil levied the top tax rate of 27.5% at the income level of 32,919 Brazilian reals, equivalent to about Rs8 lakh.
In comparison, India’s top tax rate is 30%, while in China, the top tax rate of 45% gets triggered at an income level of 100,000 yuan of monthly income, equivalent to some Rs7 lakh of monthly taxable income.
It is pertinent to note that the top tax rate in all the Bric economies has remained unchanged during 2003-2008.
The country’s highest tax rate is only one indicator of what individuals pay as tax on their income. An equally important aspect is the income threshold above which the highest tax rate is charged.
It is pertinent to note that in India the highest tax rate of 30% is triggered at a relatively low level of income of Rs5 lakh. In comparison, in the US, the highest tax rate of 35% gets triggered at income over $357,700, equivalent to about Rs1.6 crore. Similarly, in Singapore, the top rate of tax 20% is payable only on income over 320,000 Singapore dollars, equivalent to Rs1 crore approximately.
Overall, taxes on personal income are on a slow decline in many countries, which is akin to a fall in corporate income-tax rates across the globe. Keeping in view the global trend of rationalization and reduction in rates, it may be an appropriate time for India to consider reducing the slab rates from three to two and maybe gradually to one.
Also, a cut in the highest rate from 30% to 28% initially and gradually to 25% will make India’s top rate more competitive in comparison with other progressive economies. Further, increasing the threshold limit for the top tax rate from Rs5 lakh to Rs10 lakh in the near future will only be reasonable.
These steps will help provide more disposable income in the hands of the individuals and hence boost consumption, savings and investments in the economy which, in turn, would help India to continue to grow and achieve its GDP growth targets.
Vikas Vasal is executive director, KPMG.
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