Given the widening inequality between the rich and poor, the government should consider giving lower-income households a tax break. The basic exemption limit now, under the old income tax (I-T) regime, is just Rs 2.5 lakh per annum. The applicable rate for a taxable income of between Rs 5 lakh and Rs 10 lakh is a high 20%. Moreover, for years now, the 30% tax rate has kicked in at a taxable income of just Rs 10 lakh and has not been adjusted for inflation. While there are exemptions available — under Sections 80C and 80D for instance — they don’t amount to much. The government is, of course, nudging taxpayers to shift to the new I-T regime and around 60% of taxpayers have already done so. Under this regime too, the basic exemption limit is Rs 3 lakh, although the tax rebate available under Section 87A means an income of up to Rs 7 lakh is tax-free. For salaried employees, the standard deduction makes an income of up to Rs 7.5 lakh tax-free.
However, the 30% tax rate kicks in at Rs 15 lakh, which is very early. The principle of vertical equity says those earning more should pay taxes at higher marginal rates. In the old I-T regime, the surcharges are applicable in a graded manner, starting at 10% for incomes of Rs 50 lakh per annum going up to 37% on incomes of over Rs 5 crore. However, in the new regime, the maximum surcharge is 25% for incomes of over Rs 2 crore. This seems rather generous and could be revisited. A back-of-the-envelope calculation shows that if the exemption limit is raised by Rs 1 lakh, the government stands to lose around Rs 13,000 crore in revenues. However, at the same time, approximately one-fourth of this amount typically comes back to the exchequer in the form of goods and service tax collections.
It is a fact that those at the lower end of the income pyramid have a greater propensity to spend and in the current environment of weak consumption, relief to taxpayers at the lower end would spur demand. While in the current fiscal the government has a cushion in the generous dividend from the Reserve Bank of India, from next year onwards it will need to mop up far more from non-tax revenues — receipts from the monetisation of assets, for instance, has so far been modest. Tax collections are expected to maintain their momentum — net direct tax collections were up a strong 18% in FY24 over the previous year.
India’s tax base is narrow and only 7 persons pay tax for every 100 voters. To keep taxpayers in the net, a nominal rate of 1-5% for lower income slabs can be levied, compelling individuals to file a return. While improved administration and surveillance has resulted in a near 65% rise in the number of taxpayers from 57 million in FY14 to 94 million in FY22, the actual number of taxpayers is very small. The share of direct taxes in the overall tax collections needs to be higher. To achieve this, the government must refrain from being lenient on capital gains tax and taxes on dividends, which can now be taxed at source. Levies on stock market transactions can be raised even as middle-class households are given some more relief on interest earned on savings deposits.
