Union Budget and India’s Unhealthy Obsession With Income Tax Slabs

Union Budget 2024: We are in the midst of wedding season, surrounded by the crescendo of ’till death do us part’ vows. In this spirit of togetherness, there is another timeless union that deserves our attention—the union of state and taxes. An inseparable bond that has stood the test of time, so intertwined that their existence without each other is virtually inconceivable. “From the treasury,” wrote Kautilya, “comes the power of the government.”

The Central Government’s budget is the anniversary celebration of this union—offering a moment to both reminisce on their journey and chart a course for the future. In the context of a democratic state, it also serves as a platform for critique and the offering of suggestions.

Budget 2024 Expectations Income Tax Slab

In India, one recurring suggestion, closely intertwined with this anniversary, is the call to adjust the income tax slab. This revision remains eagerly anticipated, so much so that for some observers, it appears to be the primary reason for the budget presentation, apart from evaluating what has become more expensive and what has become a steal. However, in India’s case, an upward revision of the tax slab does not align with reason.

In India’s current income tax framework, only individuals earning more than 7 lakh rupees annually are mandated to pay income tax. The per capita income in India is approximately 2.14 lakh rupees. This means that the minimum income threshold for taxation in India exceeds its per capita income by more than threefold. This starkly contrasts with global norms: an American earning America’s per capita income pays 22% in taxes, while the Chinese citizen pays 10%, and the Germans not less than 14%.

Over the past three decades, India has raised its income tax threshold over a dozen times. This has eroded India’s tax base like nothing else. As a consequence of this populist generosity, only 3% of working Indians currently fall within India’s income tax bracket.

Therefore, the social-media controversy on the low percentage of Indians paying Income Tax, each time the Indian tax department releases data, fails to acknowledge that most Indians are not mandated to pay Income Taxes under India’s direct tax structure. This assertion is underscored by the recorded trend: between the fiscal years 2019-20 and 2022-23, there has been a 15.5% increase in the number of individuals filing returns who did not have any tax liability.

The data presented by the Union Finance Minister in the Lok Sabha for the fiscal year 2022-23 reveals that 7.4 crore individuals filed income tax returns. Among these, 5.16 crore people, constituting 70 percent, had zero tax liability. This suggests that the majority of filers are not evading taxes but rather fall below the taxable income threshold.

Moreover, an extraordinary number of returns were filed specifically to claim refunds, indicating that individuals whose taxes were deducted at source but who are not otherwise liable to pay income tax are seeking refunds.

According to the government’s figures on direct tax collections for 2022-23, income tax refunds saw a significant increase of 37.4 percent compared to the previous year. Taken together, these statistics lead to a singular conclusion: the current income tax slabs in India do not necessitate an upward revision.

Tax reforms in India need to mean much more. The government has to prioritize broadening the tax base and improving compliance to enhance tax buoyancy.

Expanding the tax base allows the government to maintain revenue levels even with reduced tax rates, which helps prevent economic challenges that could hinder growth.

For India, it’s crucial to undertake comprehensive reforms in corporate income tax and personal income tax, which are long overdue. Simplifying the tax structure can significantly lower compliance costs and minimize legal disputes. The focus of the next generation of tax reforms should go beyond adjusting tax brackets. The goal should be to establish a simplified tax system that reduces compliance costs and legal disputes.

Further, Income taxes should be made mandatory for individuals earning above a specified threshold, regardless of their occupation. This measure will not only help in achieving fiscal consolidation but also in mitigating economic distortions.

The imperative, today, lies in crafting a robust fiscal framework that champions fairness, simplicity, and broader participation. In honouring the enduring union of state and taxes, India must recognize that the budget conversation on direct tax must extend beyond mere adjustments to income tax slabs.

“It was only for the good of his subjects,” wrote Kalidas in Raghuvansh about King Dalip, “that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousandfold.”

Keeping with this timeless spirit, let our reforms be bold, our exemptions few, and our compliance unwavering as India strives to build a tax system that fosters economic resilience and shared prosperity for all.

-The author is a Chartered Accountant, law graduate, and an alumnus of IIM-Ahmedabad. Views expressed are personal.

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