The finance ministry is likely to retain the existing rates of 10 per cent, 20 per cent and 30 per cent on personal income tax while calibrating the tax slabs suggested in the draft Direct Taxes Code (DTC).
Senior officials in the ministry told Business Standard the rate of taxation would remain the same in the final version of DTC. “The idea of DTC is to make the tax structure simple. We believe the taxation rates of 10 per cent, 20 per cent and 30 per cent are the simplest for taxpayers, as well as tax authorities. If we try to tax the income at 5 per cent, 15 per cent, 25 per cent, or any other rate, it could become complicated,” said an official.
Another said the country had these rates for the past several years and would continue to have the same in the future as well. He said any tinkering with the rates was not required when the purpose could be served by adjusting the tax slabs in line with the government’s revenue considerations.
While the rates of taxation have remained static over the years, income tax slabs were revised upwards twice in 2009-10. Presenting the first Budget of UPA-II in July 2009, finance minister Pranab Mukherjee had widened the slabs. The revised slabs were Rs 1.6-3 lakh, Rs 3-5 lakh and above Rs 5 lakh.
In a surprise move, he further increased the slabs in the Budget in February 2010. At present, a taxation rate of 10 per cent is levied on income between Rs 1.6 lakh and Rs 5 lakh, 20 per cent on income between Rs lakh 5 and 8 lakh, and 30 per cent on income above Rs 8 lakh in a financial year.
The DTC draft unveiled last year proposed a larger widening, with the first slab in the range of Rs 1.6 lakh-10 lakh. The code did not propose any change in the rate of taxation. It suggested 20 per cent tax on income between Rs 10 lakh and 25 lakh and 30 per cent on income above 25 lakh.
The revised discussion paper on DTC is silent on tax slabs. It said the indicative tax slabs and tax rates proposed in DTC would be calibrated accordingly while finalising the legislation. The finance minister and ministry officials have maintained that rates would be part of the DTC legislation, slated to be introduced in the upcoming session of Parliament.
“The rates should remain the same initially and be gradually brought down to, may be, 20 per cent,” said Divya Baweja, head of personal taxation at BMR Advisors. He said other countries either have high rates and high slabs or low rates and low slabs. “India falls somewhere in the middle,” he added.
In most countries of the world, the highest rate of personal income tax had remained the same in the last few years. Since 2003, countries like the US (35 per cent), the UK (40 per cent), Argentina (35 per cent), China (45 per cent), Greece (40 per cent), South Africa (40 per cent) and Taiwan (40 per cent) had not changed their rates, showed a study by consultancy firm KPMG in 2009.
