Little relief for the taxpayer

Economic reforms in the past decade have led to lower income-tax rates in India, but the maximum effective rate of 31.5 per cent still manages to bite off nearly one-third of a taxpayer’s monthly cheque.
But given that a global survey of personal tax rates shows the Indian taxpayer is not too badly off, he or she is unlikely to be given more direct relief in Jaswant Singh’s first budget.
Only two countries—Singapore and Malayasia—have a maximum tax rate that is lower than India’s, and that too by a marginal 2 per cent. Therefore, senior tax officials are of the view that the maximum I-T rate will remain unchanged.
As for basic exemption limits, the level of income below which people do not have to pay any tax, India scores the second-lowest after Malaysia, which allows ample room for increasing this exemption limit.
Both these global trends corroborate the findings of the Vijay Kelkar Committee on direct taxes which has recommended to the finance minister that the basic exemption limit be raised from the current Rs 50,000 to Rs 1 lakh, without tinkering with the maximum marginal tax rate of 30 per cent.
However, the only relief for middle-class taxpayers will come from the removal of the 5 per cent surcharge, imposed in 2002 after the Kargil skirmishes with Pakistan, reducing the maximum effective rate to 30 per cent from 31.5 per cent.
As for changes in the intermediate taxation slabs, any change in basic exemptions will trigger a realignment. In this regard, the Kelkar panel had suggested that incomes between Rs 1 lakh and Rs 4 lakh should pay 20 per cent while taxpayers who earn over this slab should cough up Rs 60,000 plus 30 per cent of the income in excess of Rs 4 lakh. However, globally, very few countries have a two-tier structure.
While this recommendation broad bases the tax slab, it is unique to most global structures where multiple slab rates ensure that taxpayers who earn close to the lower limits are not forced to pay as much tax as their more affluent counterparts.
Despite the Kelkar Committee’s recommendations, standard deductions out of income are likely to stay.
Analysts argue that in the absence of any significant tax breaks for children’s marriages or for pension contributions, like 401K in the United States, the salaried class will be reluctant to part with this break.