Rates of Tax
The maximum marginal rate of tax applicable to individuals and Hindu Undivided Families in respect of taxable income of over Rs 1,50,000 is 30 per cent. Budget 2003 has abolished the 5 per cent surcharge. But in respect of taxable income of over Rs 8.5 lakh, a surcharge at the rate of 10 per cent is payable.
In respect of corporate assessees the tax rate stands at 35 per cent. Budget 2003 has reduced the surcharge in respect of corporate assessees—firms, cooperative societies and so on—from 5 per cent to 2.5 per cent. The National Task Force headed by Vijay Kelkar had recommended that the minimum alternate tax (MAT) at the rate of 7.5 per cent of the book profit should be abolished. But the finance minister has chosen to continue with mat.
Budget 2003 has exempted dividend income in the hands of shareholders. But firms have to pay a 12.5 per cent corporate dividend distribution tax. Thus, the earlier system of exempting dividend income in the hands of the shareholders and taxing the same in the hands of the company has been restored. Instead of 10 per cent, though, it has now been increased to 12.5 per cent.
Comparison with Other Countries
The rates of tax both in respect of individual assessees as well as corporates compare favourably with those of other developing countries and even developed countries. It is, however, significant to note that in most of the other countries the maximum marginal rate of tax applicable to individuals is applicable only on a very large income base. For instance, in the US, it is 40 per cent on an income of Rs 1.2 crore; in Singapore it is 28 per cent on an income of Rs 1.02 crore and in Japan it is 50 per cent on an income of Rs 1.09 crore. The corporate tax rates is 26 per cent in Singapore, 15 per cent in Brazil and 28 per cent in Malaysia.
Concessions in the Income-Tax Act
There are several provisions in the Income-Tax Act giving exemptions and deductions in respect of various types of incomes. For example, profits and gains of export-oriented undertakings and newly established undertakings situated in free trade zones are exempted. Further, there are deductions in respect of profits arising from exports—export of software, export or transfer of film software, infrastructure development and many other types of incomes.
Effect of Deductions on the Rate of Tax
Due to the existence of several incentive provisions in the Income-Tax Act, the effective rate of tax payable by assessees becomes much less than the rates specified in the Income-Tax Act. This is the main reason for the emergence of zero-tax companies wherein many big companies making large profits ended up paying zero tax or very low tax. In order to get a minimum amount of tax from such companies, the concept of mat was introduced in the Income-Tax Act.
Savings and the Income-Tax Act
The Income-Tax Act has been effectively used to generate small savings which have helped to finance housing projects and other developmental activities of the state governments. Particularly, the tax rebate which is available under Section 88 of the Income-Tax Act has helped individual assessees save a sizeable portion of their incomes. There was a proposal by Vijay Kelkar that the rebate system should be abolished altogether and in its place a higher ceiling limit of non-taxable income of Rs 1 lakh should be introduced. However, this has not been accepted by the government. The system of rebate continues to be available.
Income-Tax Act and the Common Man
The Income-Tax Act duly takes into account the needs of the common man. Firstly, there is a non-taxable ceiling limit of Rs 50,000. Secondly, standard deduction is permissible in respect of salaried assessees. Thirdly, medical reimbursement is available in respect of expenditure incurred. Apart from this, Budget 2003 has proposed to allow a rebate under Section 88 in respect of educational expenses up to Rs 12,000 per child for two children. The overall qualifying amount eligible for rebate is Rs 70,000 excluding infrastructure bonds. Additionally, senior citizens who are 65 years and above enjoy a tax rebate under Section 88B. Budget 2003 has increased this rebate from Rs 15,000 to Rs 20,000. Thus, a senior citizen earning an income of Rs 1,53,000 need not pay tax.
Budget Impact
Higher standard deduction limit; no I-T surcharge on salaries below Rs 8.5 lakh
(The author is president of The Institute of Chartered Accountants of India)
