Income Tax 23 Jan,2020
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Budget 2020: Uniformity in tax rates – the need of the hour?
Tapati GhosePartner with Deloitte India
Shalakha Kedia Deputy Manager with Deloitte Haskins and Sells LLP
Poornima GManager with Deloitte Haskins and Sells LLP.

Reduction in corporate tax rates and recent interviews of the Finance Minister suggest a high possibility in the rationalisation of individual tax rates. The reasons for reduction in corporate tax rates was to promote growth, investment and for the 'make in India' initiative. The need for rationalising tax rates for individuals will depend on other parameters related to the level of income. Differential tax rates for different categories of companies, cannot be a benchmark for fixing tax rates for individuals. The government, hence, would need to reflect upon the aspects that have an influence across different income level groups, while meeting the expectation for a rationalised tax rate.

Individuals with income below INR 5 lakh, though taxed at 5 percent are protected under the tax rebate. However the second slab of income falling between INR 5 lakh to INR 10 lakh is subject to tax at 20 percent. The steep rise in the tax rate from 5 percent to 20 percent is a big pinch to such group of individuals with mid-level income. The expectation is that the tax rate for this level of income be reduced to 10 percent and the upper band for this slab be increased to INR 20 lakh, thereby giving some relief to this category. These measures will leave some additional funds in their hands for consumption and or investment, both of which would be strong levers for boosting the economy.

The gap in the income/wealth levels between the rich and the poor is growing and this challenge has been addressed in Budget 2019 by increasing surcharge. These high levels of tax rates are forcing high net worth individuals and entrepreneurs to change their tax base to other countries. To reverse this trend, a more reasonable rate may be proposed in the Budget, with higher surcharge levels being restricted only to a much higher income level.

Individuals based in India are moving across the globe for employment and business and are comparing the global tax rates with India. As a sample, tax rates in Asia Pacific countries such as Singapore, Philippines, Malaysia and other developed countries such as USA etc. have much lower tax rates than in India. While the maximum tax rate in Singapore for an individual at the higher level income group is about 22 percent, it is about 28 percent in Malaysia, 35 percent in Philippines. Further in the case of US, the tax rate is about 37 percent for income greater than about INR 4.30 crore as compared to 39 percent in India for income above INR 2 crore and less than INR 5 crore. The higher tax rates in various jurisdictions, kick in at a significant high income levels and hence the need to relook at the tax rates.

To conclude, the expectation is for rationalised tax rates with some degree of uniformity in comparison to the tax rates prevailing in other countries.