Viability of Class Division While Accessing Tax – An Appraisal

Viability of Class Division While Accessing Tax – An

Appraisal

Dr. Ram Manohar Lohia National Law University

Taxation

SUBMITTED TO: S UBMITTED BY

MR. BHANU PRATAP SINGH SURYANSH SINGH

ASSISTANT PROFESSOR S EMESTER V

LAW 160101154

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 Viability of Class Division While Accessing Tax – An Appraisal

TABLE OF CONTENTS

1. Certificate of declaration..............................................................................3
2. Acknowledgments........................................................................................4
3. Research Question........................................................................................5
4. Research Methodology.................................................................................5
5. Introduction..................................................................................................6
6. Objective.......................................................................................................7
7. History of Income Tax…………………..................................................... 8
8. Income Tax Slab – Its History .....................................................................9
9. Comparing Tax rates with World................................................................16
10. Conclusion....................................................................................................17
11. References.....................................................................................................18

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 Viability of Class Division While Accessing Tax – An Appraisal

RESEARCH QUESTIONS

1. To analyse the concept of Tax Slab under Income Tax Act, 1961?

RESEARCH METHODOLOGY

The researcher has followed the non doctrinal method for research design. The research is
based on both primary and secondary sources. Books from the university’s library have been
used. Computer from the computer laboratory of the university has been used for the purpose
of secondary research and is the main source of project.

Sources of Data:

The following secondary sources of data have been used in the project-

1. Articles.
2. Books
3. Websites

Method of Writing:

The method of writing followed in the course of this research project is primarily analytical
and based on secondary source of data.

Introduction

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 Viability of Class Division While Accessing Tax – An Appraisal

Every individual is bound to pay income tax for the progress of the nation as per the
constitution of India. Any individual or an organization, if earning any income in the country
should mandatorily pay income tax. It helps lay down the art of economic and financial
administration. An Income Tax is a tax levied on the income of individuals or businesses
(corporations or other legal entities). Income taxation can be progressive, proportional, or
regressive. Regularized under Income Tax Act of 1961, Indian Income Tax is levied on the
income of companies, often called a corporate tax, corporate income tax, or profit tax.
Individual income taxes often tax the total income of the individual (with some deductions
permitted), while corporate income taxes often tax net income (the difference between gross
receipts, expenses, and additional write-offs). Various systems define income differently, and
often allow notional reductions of income (such as a reduction based on number of children
supported). Income tax is a key source of funds that the government uses to fund its activities
and serve the public. Most countries employ a progressive income tax system in which higher
income earners pay a higher tax rate compared to their lower earning counterparts. In the
present day tax structure there is a different slab for men and women. The tax structure is
different on different commodities and products. However, by the Assessment Year 2013-14,
men and women are slated to have a same tax slab. As per Indian Income Tax Law, senior
citizens are not  exempted from the regular income tax slab,  however, they get a better
exemption limit. Any state that is affected by the natural calamity is also subjected to the
income tax waver.

The Central Board of Direct Tax (CBDT) is the governing authority that takes discretion of
the Indian Income tax. Income tax is imposed by the government on an individual, company,
businesses, Hindu Undivided Families (HUFs), co-operative organizations and trusts. Various
Tax systems exist today, with varying degrees of prevalence. By law, businesses and
individuals must file an Income Tax Return every year to determine whether they owe any
taxes or are eligible for a Tax Refund. The first income tax imposed in America was during
the War of 1812. Its prime focus being to fund the repayment of a $100 million debt that was
incurred through war-related expenses. Post war, the tax was repealed, but Income Tax was levied
full-fledgedly during the early 20th century.1

1
Be Money Aware Blog(Awareness Empowers ) - Income Tax Overview

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 Viability of Class Division While Accessing Tax – An Appraisal

Objective of Study

1).To discuss the history and concept of tax slab.

2).To analyse its applicability in present day scenario.

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 Viability of Class Division While Accessing Tax – An Appraisal

History of Income Tax

Next to being shot at and missed...nothing is quite as satisfying as an Income tax refund.

--- F. J. Raymond

It is that time of the year again when the common man waits in anticipation for the finance
minister ('FM') to announce the annual budget. Even as the FM tries to juggle many hats and
get the balancing act right i.e. managing expectations of common man, inflation, fiscal
deficit, the common always feels that the tax rates are very high.

However, going by the history of the evolution of personal tax regime in India, a different
picture emerges. The tax rates have come down considerably over the years, indicating that
reality and perception are poles apart. By some of the key personal tax reforms that the
country has witnessed, it becomes clear that Indian personal tax regime is indeed a good one.

History of Income Tax of INDIA

The origin of the word Tax is derived from the word Taxation which means estimate.
Contrary to the general belief, Income Tax came into prominence and was levied in some
form or the other in ancient times. Taxation has ancient roots, which take us back to
Kautilya’s Arthasastra, a system which dealt with taxation in an elaborate and planned
manner. This exposition in 300 B.C., is considered truly amazing for its comprehension of the
civilisation and for the suggestions that help guide a king in running the State most
efficiently. A major portion of Arthasastra is devoted by Kautilya(Chanakya) to financial
matters including financial administration. It applied to agriculture, the collection of land
revenue and formed an important source of revenue to the State. The State not only collected
a part of the agricultural produce which was normally one sixth but also levied taxes on water
rates, octroi duties, tolls and customs duties. Taxes were also collected on forest produce as
well as from mining of metals etc. Salt tax was an important source of revenue and it was
collected at the place of its extraction. Goods were imported from China, Ceylon and other
countries and levy known as vartanam was collected on all foreign commodities imported in
the country. There was another levy called Dvarodaya which was paid by the concerned
businessman for the import of foreign goods.

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 Viability of Class Division While Accessing Tax – An Appraisal

Income Tax in India came into full swing and was recognized by law in the year 1860.
However, at the onset, it took almost five years to regularize and be implemented. Ironically,
the same decade saw a downfall of Income Tax Act in the year 1865. After a huge furor,
Income Tax Act of 1886 came into force and encapsulates the full-fledged law of Income Tax
that includes the exemptions in various agricultural professions; income tax rules on
industries and corporations. In the year 1918, launch of Act VII reformed the Income Tax
Law. This new act scrutinized the new industries that came under income tax bracket. This
new act tried to expand the horizon to generate large revenue for the country. In the year
1922, owing to the recommendation by the All India Income Tax Committee, yet another
income tax act came into existence. Unlike in the past, wherein the collections of Tax
depended on the previous year, this act introduced a new clause emphasizing the collection of
Income Tax in the current Assessment Year depending on the estimated collection of income
tax of present year. After the Income Tax Act of 1922 there have been no prominent
provisions, however, eventually, the income tax later came under the provision of Finance
Act.

Every assessment year the new tax structure is decided by the finance department of the
country that is released with the union budget. The Income Tax Act of 1922 existed until
1961. However, the government handed over the income tax clause to the law commission to
review and recast it in a logical way in an attempt to encourage the amendment of tax in an
easiest way without changing the basic tax structure. The income tax laws hold many
industries and have diversified clauses for different industries. There are various industries
where government offers wavers in subsidies from time to time. The present income tax act is
same as Income Tax Act of India of 1961.

Taking an overall view, every individual is bound to pay income tax for the progress of the
nation as per the constitution of India. Any individual or an organization, if earning any
income in the country should mandatorily pay income tax. It helps lay down the art of
economic and financial administration.

Income Tax Slabs - Its History

Income tax in India is charged based on one’s income, more the income more the tax. Tax is
on range of income called as the income slabs. In this article we shall cover Income Tax
Slabs of India, Understanding the tax based on slabs, see how slabs and tax have changed

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 Viability of Class Division While Accessing Tax – An Appraisal

over period of time in India, Compare Tax rates with world, why file income tax returns.

Income Tax Slabs

Income tax in India is charged based on one’s income, more the income more the tax. India
has four  income slabs or groups

 income not taxed at all,

 income  taxed at 10%,
 income taxed at 20% and
 income taxed at 30%.

The income slab  also varies with age(less than 60,between 60 – 80  years, more than 80),
residence(India/non-resident India), gender(male/female).   Tax slabs keep on changing from
year to year. Over and above tax, surcharge and education cess is also charged.  These are
announced in budget by the Finance Minister every year.

Interpretation of Income Slabs

Let’s understand the tax one needs to pays based on income tax slabs . Let’s take the slabs as
per FY 2012-13 or AY 2013-14

0% Tax Slab or No Tax : If person has total income of less than 2 lakhs then he does not
have to pay any tax on it.

10% tax slab : If a person has total income(under different heads) of say 4 lakh. Then

 His taxable income : Rs 4,00,000

 His income slab = 10%
 Tax on his income = 10% of his income exceeding basic exemption which for FY
2012-13 is 2,00,000 = 10% of (400000 – 200000) = 10% of 200000 = 20,000.
 On tax he needs to pay surcharge (0%) and education cess (total 3%) = 3% of 20,000
= 600
 Total tax he is liable to pay = 20,000 + 600 = 20,600

20% tax slab : For income of 8 lakh , he falls in 20% bracket

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 Viability of Class Division While Accessing Tax – An Appraisal

 So for first 2 lakh he pays nothing , on 3 lakh he pays 10%  and remaining 3 lakh he
pays 20% =30,000( 10% of 3,00,000) + 60,000(20% of 3,00,000) = 90,000
 Other way of calculating is = 30,000 + 20 % of his income exceeding 5 lakh.
 On tax he needs to pay surcharge (0%) and education cess (total 3%) = 3% of 90,000
= 2700
 Total tax he is liable to pay = 90,000 + 2700 =92,700

30% tax slab : For income of 14 lakh as it is above 10 lakh , he falls in 30% bracket .

 So for first 2 lakh he gets exemption and pays nothing, next 3 lakh he pays 10%, on
next 5 lakh he pays 20%   and remaining 4 lakh he pays 30% =30,000(10% of
3,00,000) +1,00,000(20% of 5,00,000) + 1,20,000 (30% of  4,00,000)=2,50,000
 Other way of calculating is =1, 30,000 + 30 % of his income exceeding 10  lakh.
 On tax he needs to pay surcharge (0%) and education cess (total 3%) = 3% of
2,50,000 = 7500
 Total tax he is liable to pay =2,50,000+ 7,500= 2,57,500

Senior Citizem 20% Tax slab : For a senior citizen of age between 60 years and 80 years
the exemption limit is 2,50,000. Senior citizen with income of 8 lakh ,will fall  in 20%
bracket the tax would work out to

 So for first 2 .5lakh he pays nothing , on 2.5 lakh he pays 10%  and remaining 3 lakh
he pays 20% =25,000( 10% of 2,50,000) + 50,000(20% of 2,50,000) =75,000
 Other way of calculating is = 25,000 + 20 % of his income exceeding 5 lakh.
 On tax he needs to pay surcharge (0%) and education cess (total 3%) = 3% of 75000 =
2550
 Total tax he is liable to pay = 85,000 + 2550 =87,500

Gross Total Income

Income that is used for tax slabs is  Gross Total Income. The gross total income is the sum of
all sources of income that an individual has or the total income he earns in a financial year. It
can fall into one of the five heads:
1. Income from Salary
2. Income from House Property

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 Viability of Class Division While Accessing Tax – An Appraisal

3. Income from Profits and Gains of Business or Profession

4. Income from Capital Gains
5. Income from other Sources

Change of Slabs over Time2

1950s
Maximum rate of income tax reduced from 5 annas to 4 annas. Wealth tax comes in.

1960s
The highest marginal rate on unearned income cut from 88.25 per cent to 81.25 per cent and
that on earned income from 82.5 per cent to 74.75 per cent.

1973-74
Eleven tax slabs, with rates from 10 to 85 per cent. The top marginal rate is effectively 97.75.

1985-87
Finance Minister V.P. Singh (1985-87) reduces number of IT slabs to four, cuts top marginal
IT rate to 50 per cent.

1990-91
In five Budgets between 1991-96, FM Manmohan Singh reduces IT slabs to three (20, 30 and
40 per cent).

1997-98
P. Chidambaram's 'dream budget' cuts peak rate of income tax to 30 per cent for 150k and
above. Manmohan Singh, then in Opposition, criticises the rate cut.

1998-99
Exemption limit raised to Rs 50k. Standard deduction raised to Rs 25k.

2
Be Money Aware Blog (Awareness Empowers) - article on  Income Tax rates Since
Financial Year 1992-1993.
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 Viability of Class Division While Accessing Tax – An Appraisal

2001-02
All surcharges abolished except surcharge at the rate of 2 per cent for the National Calamity
Fund.

2002-03
Two rates of personal IT slabs: 20 per cent up to Rs 4 lakh per annum and 30 per cent for
income more than Rs 4 lakh.

2007-08
Basic exemption limit for all assessees raised from Rs 1 lakh to Rs 1,10,000. Similar increase
provided to women and senior citizens.

2009-10
The Income Tax exemption limit raised by Rs 10,000 for general taxpayers and by Rs 15,000
for senior citizens. For general taxpayers, income of up to Rs 1.6 lakh per annum for men and
Rs 1.90 lakh per annum for women is tax-exempt. Senior citizens will not have to pay tax up
to an annual income of Rs 2.4 lakh.

2010-11
Under the slabs announced by Finance Minister Pranab Mukherjee, there would be no tax on
income up to Rs 1.6 lakh. Incomes between Rs 1.6 lakh and Rs 5 lakh will invite a tax of 10
per cent. For incomes between Rs 5 lakh and Rs 8 lakh, a tax of 20 per cent will be levied.
Incomes of Rs 8 lakh and above will invite a tax of 30 per cent. Pranab also increased the tax
saving limit from Rs 1 lakh to Rs 1.2 lakh by allowing an investment of Rs 20,000 in long-
term infrastructure bonds.

2011-12
Tax exemption limit raised to Rs 1.8 lakh, from Rs 1.6 lakh for individual tax papers; For
senior citizens, the qualifying age reduced to 60 years and exemption limit raised to Rs 2.50
lakh; Citizens over 80 years to have exemption limit of Rs 5 lakh. A new revised income-tax
return form 'Sugam' was introduced for small tax papers.

If one were to look at the tax rates on personal income in India, the trend is quite shocking.
Imagine those who lived in the seventies paid up to 93% of their income in taxes! And to

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 Viability of Class Division While Accessing Tax – An Appraisal

think of it, we complain that we pay high taxes. Anyway, with the continuous rationalization
of tax rates, India is only moving closer to global standards when it comes to tax rates.

Latest Income tax slabs for FY 2013-20143

This is an easy to use table of the latest income tax slab rate for individuals for year 2013-
2014. It is per union budget 2013-2014 presented on 28 February 2013.

India Income tax slabs 2013-2014 for General tax payers and Women

Income tax slab (in Rs.) Tax

0 to 2,00,000 No tax
2,00,001 to 5,00,000 10%
5,00,001 to 10,00,000 20%
Above 10,00,000 30%

India Income tax slabs 2013-2014 for Senior citizens (Aged 60 years but less than 80
years)

Income tax slab (in Rs.) Tax

0 to 2,50,000 No tax
2,50,001 to 5,00,000 10%
5,00,001 to 10,00,000 20%
Above 10,00,000 30%

India Income tax slabs 2013-2014 for very senior citizens (Aged 80 and above)

Income tax slab (in Rs.) Tax

0 to 5,00,000 No tax
5,00,001 to 10,00,000 20%
Above 10,00,000 30%

- In addition an rebate of Rs 2000 will be available for income less than Rs 5 lakhs.
- Income above 1 crore to attract 10% tax surcharge.

The systematic attempt to evolve a tax system in independent India started with
implementation of the report of Taxation Enquiry Commission in India in 1953. But the
personal income tax rates were extraordinarily high during the decades of 1950-80.

3
financeminister.in.htm
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 Viability of Class Division While Accessing Tax – An Appraisal

In 1970-71, the personal income tax had 11 tax brackets with the tax rates progressively
rising from 10 per cent to 85 per cent. When the surcharge of 10 per cent was taken into
account, the maximum marginal rate for individuals was a mind boggling 93.50 per cent  In
1973-74 the highest tax rate applicable to an individual could have gone up to an
astronomical level of 97.50 per cent

The Direct Taxes Enquiry Committee, 1971 attributed the large scale tax evasion to the
exorbitant tax rates and recommended reduction in the marginal tax rate to 70 per cent. This
change was implemented in 1974-75, when the marginal rate was brought down to 77 per
cent, including 10 per cent surcharge. In 1976-77, the marginal rate was further reduced to 66
per cent. A major simplification and rationalization initiative came in 1985-86, when the
number of tax brackets were reduced from eight to four and the highest marginal rate was
brought down to 50 per cent.

The last wave of reform in personal income taxation was initiated on the basis of the
recommendation of the Tax Reform Committee, 1991. The tax rates were considerably
simplified to have only three tax brackets of 20, 30 and 40 per cent in 1992-93. Further
reductions came in 1997-98, when the three rates were brought down to 10, 20 and 30 per
cent.

Personal income tax rates have remained stable since then, with some changes in the tax slabs
in terms of exemption limit, surcharge etc.4

Liberalisation of Personal Income Taxation

The last wave of reform in personal income taxation was initiated on the basis of the
recommendation of the Tax Reform Committee, 1991. The tax rates were considerably
simplified to have only three tax brackets of 20, 30 and 40 per cent in 1992-93. Further
reductions came in 1997-98, when the three rates were brought down to 10, 20 and 30 per
cent.

4
India Today’s article on  “A 50 year trend of Indian personal tax rates”.
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 Viability of Class Division While Accessing Tax – An Appraisal

Comparing Tax rates with world5

A country’s personal income tax rate is only one indicator of how much tax an individual
actually ends up paying on their income.

For someone with a gross income of $100,000 a year, these are the forty countries in which
they would have to shell out the most for, tax and social security combined. The United
States is much further down the list, being the 55th most expensive country on the list.

Rank  Country  Effective income tax rate Effective employee social security rate:
1 Beligium 33.9%  13.1
2 Greece  30.0%  16.5
3 Croatia  26.8  19.5
4  Italy  35.6  9.6
5  Germany  28.3  15.5
 14  India  27.3  12%

Conclusion

5
Business Insider – “The Highest Effective Personal Tax Rates In The World”
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 Viability of Class Division While Accessing Tax – An Appraisal

As seen above, the personal income tax rates have steadily declined in India, with the
maximum marginal rate of income tax coming down from a mind boggling 97.5 per cent to a
much more manageable 30.9 per cent. Also, the slabs at which the various tax rates are
applicable have been considerable widened over the years. 
The inflation is on the higher side and a common man is struggling to manage his household
budget and expects additional tax relief. While a further reduction in tax rates may not
completely solve the common man's problems, it will certainly go a long way in putting some
much needed extra cash in his hand so that he is able to manage his household budget.

Bibliography

Dr. Vinod .K. Singhania and Dr. Kapil Singhania, Taxmann’s Direct Taxes(law and

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 Viability of Class Division While Accessing Tax – An Appraisal

practice ), 46th edition, 2011-2012.

Webliography

 Business Insider – “The Highest Effective Personal Tax Rates In The World”
 India Today’s article on  “A 50 year trend of Indian personal tax rates”.
 financeminister.in.htm
 Be Money Aware Blog (Awareness Empowers) - article on  Income Tax rates Since
Financial Year 1992-1993.
 Be Money Aware Blog(Awareness Empowers ) - Income Tax Overview

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