With regard to rates of taxation for individual and HUFs, the Parliamentary Standing Committee on Direct Taxes Code had observed the following:
“When the present Income Tax Act was enacted way back in 1961, the per capita income of this country as
extremely low. During the course of five decades of the working of the Income Tax Act, the national per capita income has increased multi-fold, widening the scope for taxing various incomes. At the same time, the
absolute number of poor has also increased manifold, warranting much larger government outlays. The aspirations of the people for better living standards and their expectation from government to deliver the same has also simultaneously increased. It is therefore, necessary that these challenges in a growing economy and a developing society are kept in mind, while formulating a new Direct Tax Law.
A Direct Tax by definition is a levy on the income A Direct Tax by definition is a levy on the incomes, profits and wealth earned and generated by individuals and entities. Thus, a direct tax by its very nature and scope cannot be imposed on everybody. It has necessarily to be a focussed levy which should reflect and tap the rising incomes and prosperity in a growing economy. The tax rates and structure should therefore be tailored in a way that will ensure sufficient buoyancy and dynamism. As the economy expands and diversifies, the tax policies cannot remain caught in a time-warp. Ways and means of augmenting revenue would have to be found not merely by broadening the base but also by deepening the trunk to tap both potential as well as concealed incomes and wealth. In this regard,there are three distinct categories of income, which require to be tapped or brought to book, namely
(a) untaxed/non-taxed income;
(b) potential income;
(c) concealed income.
On the whole, the Committee would expect the tax policy and procedures to be fair, just and equitous, bringing fiscal stability at least over the medium-term, obviating the need to make changes in rates structure etc. during every Budget.
Fiscal stability together with certainty will no doubt go a long way in sustaining economic growth and development. Needless to say, governance standards would, in the final count, determine the efficacy and the credibility tax policies carry with taxpayers.
The Committee find from the information made available that tax collected in the income slab of 0-10 lakh is Rs. 21,094 crore and the total number of taxpayers is about 2.76 crore; while the corresponding figures for the income slab of 10-20 lakh is Rs. 10,185 crore with only 3.35 lakh taxpayers; the same for the more than
20 lakh income slab is Rs. 53,170 crore tax collected with a mere 1.85 lakh taxpayers. The Committee further find that in the income slab of 0-2 lakh, the number of taxpayers is around 2.02 crore, which decreases to 56.73 lakh in the next income slab of 2-4 lakh. With regard to the percentage of taxpayers in different income slabs, it is 89% (0-5 lakh), 5.5% (5-10 lakh),4.3% (10-20 lakh) and 1.3% (above 20 lakh). On the corporate tax side, the tax collected in the slab of 0 to 100 crore is Rs. 44,016 crore, Rs.23,421 crore in 100-500 crore slab; and Rs. 54,558 crore in the above 500 crore slab. The extent of revenue foregone for the above slabs has been found to be Rs. 23,200 crore, Rs. 11,779 crore and Rs. 27,895 crore respectively. The figures mentioned above only seek to confirm the view that the tax structure and the prevailing tax regime is regressive –both for individual as well ascorporate tax payers. The Committee desire that the character of the tax regime should change and it should be made more progressive. This would entail greater relief for small taxpayers – both individuals and corporate and moderately higher rates for taxpayers in the higher bracket.
The Committee find it astonishing that almost 90% comprise of individual taxpayers in the 0-5 lakh income slab without commensurate tax yield; which translates into nearly 3 crore assesees. In a belated recognition of this paradox, the Department has exempted taxpayers in the lower income slab (0-5 lakh) from filing tax returns, thereby reducing the Department‟s processing burden. The Committee find it absurd that the Department should diffuse their energies and spread their resources thin over handling such a large number of
individuals with low income potential.
The argument that more taxpayers have to be brought within the tax net for widening the tax base can hold water only to the extent that this approach brings in more taxpayers and tax revenue from the higher income brackets, rather than simply adding to the numbers in the lower segments.
Keeping in view the inflationary trends in the economy and the imperative to leave more disposable incomes in the hands of individual tax payers, particularly those in the lower income bracket, the Committee would recommend that the tax slab attracting „nil‟ rate, that is, full exemption from tax on income should be raised to three lakhs from the proposed two lakhs. Higher exemption limit may be considered for women and senior citizens. The age for senior citizens should be relaxed from 65 years to 60 years. As reasoned earlier, higher exemption limit would go a long way in minimising the compliance and transaction costs of the Income Tax Department, which can now focus their attention and re-orient their resources on the higher income groups, untaxed or concealed incomes, and categories and sectors that are avoidance or evasion prone.
The revenue gap, if any, could be easily bridged by way of stringent measures to curb and bring to book unaccounted money and through realisation of huge tax arrears and by way of savings from the proposed transition to the investment-linked incentive / exemption regime.
Thus, in the light of reasons cited above and in pursuance of the well recognised and widely accepted rationale of moderate tax rates inducing better tax compliance and with a view to giving some relief to the small tax payers, the Committee would recommend the following revised tax slabs :
Slab (lakhs) Tax rate
beyond 20 30%