The maximum marginal rate of tax should be made applicable only to incomes above Rs 10 lakh.
With globalisation, there has been a convergence in tax rates and structures. The Kelkar Task Force pointed out that with increasingly mobile and frictionless capital flows, outward-looking economies soon came to realise that getting a share of competitive global capital necessitated keeping the tax rates low and the tax rules simple in line with global trends.
The tax administration has become simpler, with lower tax rates and fewer exemptions.
Several committees have advised that the basic exemption limit must be at a moderate level and that it should strike an appropriate balance between tax liability at the lowest level, administrative cost of collection and compliance burden of the smallest taxpayers.
We now have three tax slabs and experts have recommended that the maximum marginal rate of tax should be moderate, so that the distortions in the economic behaviour of taxpayers and incentive to evade tax payments are minimised.
The greater the number of tax slabs, larger is the distortion due to bracket creep. Fiscal experts have come to favour a moderately progressive, flat or single marginal rate of tax on a comprehensive base.
But no developed country has accepted the flat rate of tax which is widely administered in Eastern Europe and Russia.
Whereas in India, the maximum marginal rate of tax of 30 per cent applies on incomes above Rs 2.5 lakh, the base income for the highest tax slabs is $8,843 in Brazil, $9,555 in Mexico, $12,082 in China, $22,371 in Indonesia, $38,060 in South Africa, $51,358 in the UK, $167,395 in Japan and $319,000 in the US.
There is, therefore, much to be said in favour of the view that the maximum marginal rate of tax should be made applicable only to incomes above Rs 10 lakh. It is also necessary that the exemption limit, now at Rs 1 lakh, should be substantially raised to take into account the impact of inflation which is now at about 5.5 per cent.
It was Dr Manmohan Singh who first introduced the concept of inflation indexing. But it has been confined only to the determination of long-term capital gains for immovable property.
The concept has reduced the capital gain tax burden. Repeated calls to extend the concept to all other types of income have been of no avail.
Spare the pensioners
Standard deduction has been done away with for the salaried class. This should be brought back at least for the pensioners. Unfortunately, the Government is planning to impose TDS even on interest from the 8 per cent taxable bonds and the 9 per cent senior citizens schemes.
The real income from these schemes is only around 3 per cent if inflation is taken into account. With banks offering a higher rate of interest, little wonder that these are facing the same fate as the National Savings Certificate scheme, which has few takers today. The fixed deposit scheme of banks is eligible for tax benefits under Section 80C up to Rs 1 lakh. While this is welcome, it is necessary that the lock-in period be brought down from 60 to 36 months at least in the case of senior citizens.
Most senior citizens, as pointed out by the Kelkar committee, are risk averse and face the prospects of a double jeopardy reduction in interest rates and withdrawal of incentives. A higher exemption limit for senior citizens and the lifting of TDS on interest incomes earned by them will provide a human face to the tax code. The absence of social security makes it incumbent on the Government to ensure that senior citizens are left with as much tax-free incomes as possible to take care of their needs in old age.
There is also a crying need for abolition surcharges and cess. Taxpayers need not be burdened with the constitutional requirements of allocation of resources, which is object for the levy of Union surcharges, in the collection and distribution of which States have no share. If not abolished, cess and surcharge should at least be taken out of the personal income-tax law.
T. C. A. Ramanujam (The author is a former Chief Commissioner of Income-tax.)