97% to 42%: How tax rates for individuals changed

Income tax was introduced for the first time in the country during the pre-independence period by Sir James Wilson, a civil servant in British India in 1860. The tax was introduced as a temporary measure to meet the expenses of the British government during the Sepoy Mutiny of 1857 (also known as the First War of Indian Independence). A small percentage was imposed,” said Tapati Ghosh, partner at Deloitte.

Eventually, the income tax became permanent and its scope expanded to include a larger segment of the population as the government sought new sources of income.

The year 1961 is said to have shaped the present tax system. Significant amendments to the rules led to the Income Tax Act of 1961, which empowered the authorities to levy, administer, collect and recover income tax. In terms of tax rates, during 1973-74, India saw the highest ever marginal tax rate (including surcharge) of 97.75%. It was gradually brought down to 50% in 1991-92 and further reduced to 30% in subsequent years. Currently it is 42.7%.

India, like many other countries, follows a progressive tax structure for taxation. That is, as the taxable amount increases, the tax rate increases. At present, we have four tax slabs under the old tax regime: No tax on income up to 2.5 lakhs. income of 2.5–5 lakh is taxed at 5% (with tax exemption), 5- 10 lakh 20% and above 10 lakhs at 30%.

The limits of the above slabs were mostly left unchanged in the last decade despite the rise in inflation in the country (see graphic), The government has reduced the burden on those at the bottom of the pyramid to an extent by introducing tax exemptions and standard deductions ( 50,000 for salaried).

However, people in the middle and higher income groups have high expectations from Budget 2023. They want a change in the maximum slab limit to match the current environment of rising income levels.

With inputs from Tapati Ghosh, Partner, Deloitte, we set out the key events in the history of income tax with respect to changes in tax slabs and tax rates for individuals, starting from 1991 (see graphic), beginning a decade of economic reforms in the country. Note that we have not allowed ‘deductions’ from taxable income for the purpose of this story.

key events

Former Finance Minister P. Chidambaram in his ‘Dream Budget’ in 1997 made several changes by replacing the existing tax rates—15%, 30% and 40%—with new rates of 10%, 20% and 30% respectively.

Introducing the new tax rates and brackets, Chidambaram said, “I believe that a good tax policy should aim at moderate rates, a broad tax base, simple procedural rules and achieving greater compliance.”

It was again Chidambaram who changed the tax brackets in a significant way in 2005. In that budget, he introduced a separate exemption limit for women. 1.25 Lakh ( 1 lakh for ordinary taxpayer) which is no longer there. Also, in 2008, they raised the minimum and maximum limits 1.5 lakh more 5 lakh respectively. After this, a major change in personal income tax in India was seen only in 2017-2018, when the then Finance Minister Arun Jaitley reduced the minimum tax rate from 10% to 5%. 2.5 Lakh onwards 5 lakhs.

In Budget 2020, the current Finance Minister Nirmala Sitharaman introduced the new tax regime (7 slabs), offering lower tax rates, but without the benefit of most deductions and exemptions.

At present, earning of individuals up to 2.5 lakh per annum no tax has to be paid. In addition, up to taxable income 5 lakh is tax-free because of the exemption provided by section 87A. Maximum tax bracket with a limit of Rs. 10 lakh (taxed at 30%) has been left unchanged from 2012. According to experts, the increase in the middle class population in India over the years makes a strong case for revision of this limit.

overload: on and off

In the past, a surcharge (tax on tax) on direct taxes was usually levied to meet revenue needs arising from natural calamities. In the 1990s, it was levied only when there was a special revenue requirement for the Centre.

In 2000, the then Finance Minister Yashwant Sinha decided to increase the surcharge from 10% to 15% to meet the “huge and unexpected expenditure burden” for defense requirements in the wake of the Kargil War. Sections of the society will gladly bear this additional burden,” he added in his budget speech.

In 2001, he removed the surcharge on all tax payers except 2% (earning more than 60,000) for Gujarat earthquake relief.

After that, the surcharge was removed and re-imposed with different limits in different budgets. Since 2013 – when Chidambaram imposed 10% surcharge on disproportionate income 1 crore—the levy has become permanent in India.

At present, the surcharge rate is 10% of the tax amount for income 50 lakhs and above but does not exceed 1 crore. for above income 1 crore but not more 2 crores, it is taxed at 15%. Taxes go up to 25% if income exceeds 2 crores but no 50 million. in excess of income 5 crores, the surcharge being as high as 37% of the tax amount. This raises the highest marginal tax rate (including surcharge) to 42.74%, the highest in the last three decades.

This surcharge is in addition to the levy of Education Cess, which was introduced in India in 2004 at 2%. This is now called ‘Health and Education Cess’, which is levied at 4% on the amount of tax and surcharge.

technology push

The history of Income Tax in India would be incomplete without mentioning the department’s move towards technology based processing of returns in the last two decades.

From simple forms in the early 2000s to filing IT returns electronically, the Income Tax Department in India now has end-to-end online preparation and e-filing of income tax returns, e-payment of taxes and refunds directly to taxpayers. is arranged. Bank accounts across the country.

To further ease the tax filing process, the department has come up with pre-filled tax returns which include details including salary income, capital gains from securities, bank interest, dividends and tax deductions.

As far as assessment is concerned, we now have e-assessment of tax returns and faceless appeal system. The government laid the foundation for the National Faceless Income Tax Appellate Tribunal Centre, a quasi-judicial authority for filing appeals against the orders of officers in the Appellate Department.

The income tax system has certainly come a long way in India, but further progress is needed in terms of having tax brackets that account for inflation and a stable tax regime in the long run.