By Subhash Lakhotia, Tax Guru : CNBC Awaaz, Tax & Investment Consultant

To curb fiscal deficit it is apprehended that the Finance Minister may think of increasing the rates of Income-tax while presenting his Budget for the year 2013-14. In the present scenario any attempt to increase the maximum marginal income-tax rates will be detrimental to the growth of trade and industry and it is expected that the same will also hurt the GDP growth.

It is a well known fact that in spite of the desire of the Government to contain inflation the fact remains that presently the Government is not in a position to put a check on the rising inflation in the country. It is also a fact that the Reserve Bank of India is also concerned about controlling inflation but still the hard fact of the matter remains that no headway is achieved to contain inflation. The cost of petrol, diesel, cooking gas coupled with the cost of day to day necessities of life is ever increasing specially in the last two years. Viewed in this context the Government should seriously think of maintaining status quo with regard to the marginal rate of income-tax specially for the forthcoming financial year 2013-14.

Presently the highest marginal rate of income-tax is 30 per cent for individuals as well as for the Corporate Sector. This marginal rate of income-tax of 30 per cent is almost steady for the last over fifteen years. In addition to Income-tax, education cesses as well as surcharge is also payable by select group of taxpayers. However, in between last fifteen years there was slight increase in the marginal income-tax rate for two/three years. Two decades ago the maximum marginal rate of income-tax was 40 per cent and the same was 50 per cent in the year 1985-86. Similarly, way back in the year 1980-81 the maximum marginal rate of income-tax was 66 per cent. In the year 1974-75 the peak income-tax rate was 77 per cent. However, the highest marginal rate of income-tax in India used to be 93.5 per cent between 1970 to 1974. It is also a fact that in 1973-74 the highest tax rate applicable to an individual could have gone to 97.5 per cent. It was expected that even at such high tax rates the tax payer would be honest !

It is an undisputed fact that as and when there has been reduction in the peak income-tax rates, then in those years we have seen growth in the collection of income-tax. This fact will convince the law makers that in case marginal income-tax rates are hiked, then there is every possibility that the overall collection will suffer. Hence, the fact remains that with the rise of income-tax rates, there is also a fear of increase in the fiscal deficit of the country due to lower tax collection consequent to hike in the income-tax rates.

In the last two decades due to stability with reference to peak income-tax rates we have seen that year after year there has been a steady growth in the collection of income-tax revenue. It is the highest collection of income-tax in last two decades that is responsible for coming to the conclusion that if the tax rates are reasonable, there is going to be growth in tax collection in the country. Hence, the Government should understand the reality of the situation and should never ever dream of increasing the income-tax burden on the tax payers of India by introducing higher dose of peak income-tax rates. It is great that the Hon’ble Finance Minister recently gave an indication that tax rates might not be raised in forthcoming Budget.

It is a well known fact that black money would rise if there are higher tax rates because the higher tax rates provide for incentives to the tax paying public for indulging in black money and tax evasion transactions. The Government should appreciate that because of reasonable tax regimes continuously for the last over one decade, there has been less activities by the tax payers in the sphere of black money and tax evasion transactions. Hence, to ensure that the tax payment culture by the tax payers is maintained in the years to come, the Government should not at all disturb the peak income-tax rate of 30 per cent and should continue with the same peak income-tax rate for the next financial year 2013-14.

Personally I feel that in case the Finance Minister takes a super dynamic approach by cutting down income-tax rate by 5 per cent, then surely the overall tax collection will improve in a guaranteed manner thereby helping the Finance Ministry to cut down the fiscal deficit. Reversely in case higher tax rates are introduced, then maximum tax payers specially our Non-Resident Indians would not be interested to bring back their funds in India. The recent hike of income-tax in America, France etc. will not help India to get more money into India specially from Non-Resident Indians in case we too in India have a hike in Income-tax rates. Hence, any attempt to think of introducing higher income-tax rate will be detrimental to the growth of GDP in India and would ultimately result in lower tax collection.

It is suggested that the Government should make all out efforts to increase the tax payers base in the country so that all those who are not paying their due taxes are brought within the tax net. This one single agenda if implemented by the Government would help the Finance Ministry to get over fiscal deficit. The Government should also think of introducing Income-tax on rich farmers of the Country. It is high time to think and ponder why the rich farmers should not make payment of Income-tax on their agricultural income.

Although the Finance Minister has given the assurance that there may not hike in the tax rates but equally what is important is to also get an assurance that no new taxes would be introduced. It is expected that at least to maintain the tax culture of stable tax rates the Finance Minister will not burden the tax payers with higher tax rates, rather all types of surcharges and cesses should also go away. So that the tax calculation remains simple and easy. Finally, the provisions of the Income-tax Act should be made very simple and easy to understand which will result into better tax compliance by tax payers.