We’ve come a long way
From an eye-watering 97.75 percent as the highest tax rate and 11 slabs, to 30 percent as the highest rate and three slabs, India and her taxpayers have a long way since independence.
Although a lot of reforms have been absolutely non-eventful, a few have come in with a Big Bang.
Evolution of Tax System in India
A systematic attempt to evolve a tax system in independent India started with the implementation of the report of the Taxation Enquiry Commission in India in 1953.
The personal income tax rates were extraordinarily high or ‘draconian’ during the decades of 1950-80.
The first time tax rates were imposed within independent India. The then FM, John Mathai reduced the taxes on income up to INR 10,000 to 1/4th Anna. The tax on 1st slab was reduced from 2 Annas to 9 Pies and the tax on 2nd slab was reduced from 2 Annas to “one nione pies”.
*An Anna is a currency unit formerly used in India. 1 Anna = 1/16 of Rupee. It was divided into 4 Paisa or 12 Pies. Hence there were 64 Paise in a Rupee and 192 Pies.
Finance Minister Y.B. Chavan cut the maximum rate from a ‘draconian’ 97.75% to 75%. Taxes were lowered for taxpayers of all levels of income.
Zero tax for individuals earning upto INR 6,000. The marginal rate of basic income-tax was kept at 70% on the income slab over INR .70,000. The surcharge was also reduced. This was 10% of all categories. Hence the effective tax amounted to 77% in the highest slab.
Wealth tax was also increased.
The tax structure was greatly modified by Vishwanath Pratap Singh. The number of income tax slabs was reduced by half – from eight to four. Individuals earning less than INR 18,000 paid no tax. The rate of income tax on the slab of INR 18,001 to INR 25,000 was fixed at 25%. The income tax on slab of INR 25,001 to INR 50,000 was 30%. And the tax on INR 50,001 to INR 1 lakh was 40%. The highest rate of income tax was reduced from 61.875% to 50% on income slab above INR 1 lakh.
Liberalization of Personal Income Taxation
The last wave of reform in personal income taxation was initiated on the basis of the recommendation of the Tax Reform Committee, 1991. Henceforth, the tax rates were considerably simplified.
Personal income tax rates have remained stable since then, with some changes in the tax slabs.
The tax structure from this period looked a lot like the structure we know today. The then Finance Minister Manmohan Singh reduced the number of slabs to three.
The lowest tax rate was 20%, applicable for income levels between INR 30,000 to INR 50,000. A middle slab was introduced for income levels of INR 50,000 to INR 1 lakh. The tax rate was 30%. A maximum rate of 40% was applicable for those earning above INR 1 lakh.
After a gap of 2 years, Manmohan Singh decided to adjust the tax slabs but keep the rate unchanged. Hence, the first slab was set at INR 35,000 to INR 60,000, with the same rate of 20%. The second slab was set at INR 60,000 to INR 1.2 lakh with the same rate of 30%. The maximum tax rate of 40% was set for income over INR 1.2 lakh.
A lot of Finance Ministers changed the tax structure in their own ways. But it was P. Chidambaram who presented the ‘Dream Budget’.
He replaced the prevailing rates of 15%, 30% and 40% with 10%, 20% and 30%. Those in the first slab earning INR 40,000 to INR 60,000 paid a tax of 10%. The middle slab was between INR 60,000 to INR 1,50,000 with a tax rate of 20%. 30% was the tax rate for incomes above INR 1,50,000.
The standard deduction limit was increased to INR 20,000. This was supposed to be applied uniformly to all salaried taxpayers. It was also announced that all employees drawing a salary of INR 75,000 per annum and contributing 10% to the provident fund would have to pay no tax at all.
The 21st Century
A decade went by without any considerable changes to the tax structure. P. Chidambaram once again stepped up to make a few important changes to tax brackets. He announced that those earning up to INR 1 lakh would pay no tax. Those earning INR 1 lakh to INR 1.5 lakh were taxed at 10%. Income between INR 1.5 lakh to INR 2.5 lakh were to be taxed at 20%. Finally, those earning over INR 2.5 lakh were to pay 30% as tax.
After a gap of five years, Pranab Mukherjee, changed the income slabs.
He announced that those earning up to INR 1.6 lakh would pay zero tax, those in the income bracket of INR 1.6 lakh to INR 5 lakh would pay 10%, those in the bracket INR 5 lakh to INR 8 lakh would pay 20%, and anyone earning more than INR 8 lakh would pay 30%.
Mukherjee increased the exemption limit for the general category of individual taxpayers from INR 1.8 lakh to INR 2 lakh. He also changed the tax slabs slightly.
He announced that those earning up to INR 2 lakh a year did not have to pay tax, those earning between INR 2 lakh and INR 5 lakh would now pay 10%, those earning INR 5 lakh to INR 10 lakh would pay a tax of 20%, those earning above INR 10 lakh would pay 30%.
With the passage of Finance Bill, 2015, wealth-tax was abolished with effect from assessment year (AY) 2016-17. Finance Minister Arun Jaitley replaced the wealth tax with a surcharge of 2% on the super-rich with a taxable income of above INR 1 crore. Taxpayers, therefore, were not required to file a wealth tax return from AY 2016-17 onward.
Jaitley reduced the existing rate of taxation for individuals with income between INR 2.5 lakh and INR 5 lakh to 5% from the present rate of 10%.
Added to this, the existing rebate under Section 87A of the Income-tax Act, 1961 (which was earlier given to people earning up to INR 5 lakh) was reduced to INR 2,500 from INR 5,000. This was for those earning between INR 2.5 lakh and INR 3.5 lakh. Hence, due to the combined effect of the new rebate under Section 87A and the reduction in the lowest slab to 5%, the tax burden for those earning up to INR 3 lakh would be nil. And for those in the INR 3 lakh to INR 3.5 lakh bracket would be INR 2,500.
The new tax regime came in as a shock. A second tax regime was introduced along with the ongoing regime.
It is divided on the grounds whether an individual wishes to claim deductions u/s 80C. If an individual does not wish to claim deductions, he is liable to pay taxes as per the new tax regime.
The rates under the new regime have been increased. For income levels upto INR 2.5 lakh, tax is exempt. The tax rate is 5% for income slab between INR 2.5 lakh to INR 5 lakh. The middle slab was between INR 5 lakh to INR 10 lakh with a rate of 20%. The final slab is for income level above INR 10 lakh with a rate of 30%.
As seen above, the personal income tax rates have steadily declined in India, with the maximum marginal rate of income tax coming down from a mind boggling 97% to a much more manageable 30%. Also, the slabs at which the various tax rates are applicable have considerably widened over the years.
The inflation is on the higher side and a common man is struggling to manage his household budget and expects additional tax relief. While a further reduction in tax rates may not completely solve the common man’s problems, it will certainly go a long way in putting some much needed extra cash in his hand so that he is able to manage his household budget.