A Brief on the Evolution of Income Tax Slab Rates

Year 2019, is not just another year, it is being touted as “the year”. The year of elections, this will change the dynamics of our country – politically, socially, economically as well as financially. Therefore, no brick will be left unturned by the ruling government as well as the opposition to woo people, counting in an impressive budget. There are several changes in the Budget each year that warrant subsequent changes in the Income Tax Act by the respective Finance Act. However, Income tax slab rates are the most talked about, but haven’t seen any dynamic changes in the past few years.

However, going by the history of direct tax slab rates, a completely different picture emerges. The tax rates from the days of Independence which were as high as 90-98% have come down to 30% over the years, indicating that perception and reality are poles apart. Let’s consider how the Income tax rates and slabs have evolved over the years:

• It was almost 70 years ago, in 1949-50 when the tax slabs were introduced in India. The exemption limit was as low as INR 1500, with 4 different tax rates – entry rate being 4.69% to maximum 25%.

• The year 1970 was the landmark year with maximum tax brackets in Indian history -- 11 and the highest tax rates on the personal income. The Direct Taxes Enquiry Committee, 1971 attributed ridiculously high tax rates as the reason for tax evasion and recommended a reduction in tax rates which went down drastically to approximately 75%.

• FY 1985-86 saw some major rationalization and reduction. The tax brackets were reduced to 4 and the highest marginal rate was brought down to 50 per cent. INR 18,000 was the basic exemption limit, a tax @50% was paid by those earning above 1lac.

• Another wave of reform touched the direct taxes during 1992-93, initiated by the Tax Reform Committee, 1991 under the leadership of Manmohan Singh rates were restricted to have only 3 tax brackets of 20%, 30% and 40%.

• The budget of 1997-98, saw the three rates coming down to 10, 20 and 30 per cent. The so-called ‘Dream Budget’ also witnessed an increase in the limit of standard deduction to INR 20,000. Further, Mr. P. Chidambaram announced that all the employees drawing a salary of INR 75,000 per annum and contributing 10 per cent to the provident fund would have to pay no tax at all.

• The year 2004 did not have any major changes in brackets or rates, however, all taxes were rather topped up by a 2% Education Cess.  

The budget of 2005 increased the tax bracket for women to INR 1,35,000 and to INR 1,85,000 for senior citizens. It was only after a gap of five years, Pranab Mukherjee, changed the income slabs to:

• Earning < INR 1.6 lacs, pay zero tax,

• Earning INR 1.6 - 5 lacs, pay 10%,

• Earning INR 5-8 lacs, pay 20%

• Earning >INR 8 lacs, pay 30%

Wealth-tax was abolished with effect from the assessment year 2016-17 and replaced with a surcharge of 2% on the super-rich with a taxable income of above INR 1 crore. The existing rates for individual assesses were further altered to 5% from the current 10% on earning between INR 2.5-5 Lacs. The rebate u/s 87A was also reduced to INR 2,500 from INR 5,000.

There is Inflation in the economy, and a common man is struggling to meet ends. While a reduction in taxes is not the overall solution, it certainly goes a long way. As evident above, the tax structure has remained. the same in the past 20 years. For articles by experts on amendments in the budget, expectations, bills, reforms among other analysis, subscribe to the Direct Tax Online by Wolters Kluwer.

Summary

Discussing the various changes in the Income tax slab rates over the years and considering the current rates.