India announced a new tax regime in Budget 2020 with more slabs and lower tax rates in order to simplify the process and eventually move towards a deduction/exemption free structure. However, three years later we find that there have been very few takers of this new regime. Not only the new regime, there are serious lacunae which still exist in the old regime. It’s high time Finance Minister Nirmala Sitharaman rejigs the personal income tax structure in Budget 2023 and in the process provide relief to the salaried middle class reeling from high inflation, layoffs, and living under the shadow of a global recession.

Old regime 

Under the old regime, we do not have a 10 per cent or a 15 per cent tax slab. Income from Rs 2.5 lakh to Rs 5 lakh is taxed at 5 per cent, and income above Rs 5 lakh up to Rs. 10 lakh is taxed at 20 per cent. The tax rate for this Rs. 5-10 lakh slab hits 20 per cent straightaway, four times the previous tax rate.  

While we have just 4 tax slabs and rates, the USA, South Africa, and China have 7 each; Russia has one flat rate, while Singapore has 13. Not only do we have lesser tax slabs and rates, our highest tax rate of 30 per cent kicks in at much lower income levels of more than Rs 10 lakhs per annum compared to global rates. 

  • In China for example, the 30 per cent tax rate kicks in at 4,20,000 CNY (more than Rs 50 lakh at current exchange rates). 
  • In Russia, all income is taxed at 13 per cent (less than half our peak rate). 
  • In the USA, income above 10 lakhs and up to 34 lakh is taxed at just 12 per cent (30 per cent of our peak rate). 
  • In Singapore, the first 20,000 SGD (Rs. 12.4 lakh) income is exempt from tax while the highest slab attracts a tax rate of 24 per cent for 100,000 SGD (Rs 6.2 crore). 
  • In South Africa, 31 per cent tax rate is applicable on income of about 17 lakh and above at current exchange rates.

Comparison of Tax Rates

Income p.a.

USA

CHINA

RUSSIA

SINGAPORE

INDIA (current)

INDIA (suggested)

Rs 2,50,000

10%

3%

13%

Nil

0%

0%

Rs 5,00,000

10%

10%

13%

Nil

5%

5%

Rs 10,00,000

11%

10%

13%

Nil

20%

10%

Rs 20,00,000

10%

20%

13%

3.5%

30%

20%

Rs 30,00,000

22%

20%

13%

7%

30%

30%

Rs 40,00,000

22%

25%

13%

7%

30%

30%

Rs 50,00,000

22%

30%

13%

11.5%

30%

30%

Source: www.taxsummaries.pwc.com

We now have a unique situation where corporations irrespective of income, pay tax at rate of 25 per cent while individuals with paltry income of more than Rs 10 lakh have to pay tax at the rate of 30 per cent. The enormity of the anomaly is so high that for the 1st time in 12 years in the financial year 2020-21, the personal income tax collections were higher than the corporation tax collected by the government.

A balancing of the slabs – rates combination as suggested will provide succor to the salaried middle class who bears majority of the burden of income tax on its shoulders. Income from Rs 5 lakh up to Rs 10 lakh should be taxed at 10 per cent, from Rs 10 lakh up to Rs 20 lakh at 20 per cent and income above Rs 20 lakh at 30 per cent. This will bring some parity with global rates.

We haven’t received any benefit of low crude prices over the years, and witnessed high petrol / diesel rates due to the government raising excise duty to fund infrastructure projects. Even today, taking into account the Russia-Ukraine war impact on crude oil price and depreciation of the rupee vis-à-vis dollar, the INR price of crude oil is similar to what it was in May 2014, when Prime Minister Narendra Modi took oath. However, fuel prices in India have increased by more than 25 per cent.

With the introduction of the GST, service tax rate has witnessed an increase from 15 per cent to 18 per cent. This has increased the cost of services like telecom, insurance, travel etc. again pinching the pocket of the middle class. Further, retail inflation in India has been high last year, above the RBI target of six percent for 10 out of 12 months.

New regime

Under the new tax regime, though the tax slabs have increased to 7 in line with global peers, the gap between two slabs is very less of Rs. 2.5 lakh only. The highest rate of 30 per cent hits at Rs 15 lakh in this system, compared to Rs 50 lakh in China.

As deductions are not allowed in this regime, it is less attractive compared to the old regime, leading to a higher tax outgo. The slabs need to be made of Rs 5 lakh each, so instead of two slabs Rs 5-7.5 lakh and Rs 7.5-10 lakh, we need to have one slab of Rs 5-10 lakh and likewise. This would lead to the highest tax bracket of 30 per cent kicking in income above Rs 25 lakhs instead of current Rs 15 lakh. 

 Comparison of Tax Rates

Income p.a.

Current

Suggested

0 - Rs 2,50,000

0%

0%

Rs 2,50,000 – Rs 5,00,000

5%

5%

Rs 5,00,000 - Rs 7, 50,000

10%

10%

Rs 7, 50,000 - Rs 10,00,000

15%

10%

Rs 10,00,000 – Rs 12,50,000

20%

15%

Rs 12,50,000 - Rs 15,00,000

25%

15%

> Rs 15,00,000 (current) /

Rs 15,00,000 – Rs 20,00,000 (suggested)

30%

20%

Rs 20,00,000 – Rs 25,00,000 (suggested)

30%

25%

> Rs 25,00,000 (suggested)

30%

30%

India is a domestic demand oriented economy and not an export dependent economy. Slowdown in personal consumption is one of the key problems facing our economy. Personal consumption is the highest component of India’s GDP. It has contracted as a per cent of the GDP by 300 basis points (bps) over the past 3 years (down from 60.5 per cent in 19-20 to 57.5 per cent in 21-22). This needs immediate attention and leaving more money in the hands of people, through rationalization of tax rates seems to be the only solution in sight.

Amitabh Tiwari is a SEBI-registered investment advisor.

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