Union Budget 2019: India's income tax base not wide in proportion to population; taxpayers' number rises in past 5 years

Income tax is a major source of direct taxation in India. In simple terms, tax levied directly on the personal income is income tax. In India, the Income Tax Act, 1961 is the guiding legislation for the levy, administration, collection and recovery of income tax. While the law is over five decades old, it is frequently changed to reflect the changing economic profile of India. The changes, especially the tinkering of the tax slabs, is generally undertaken during the annual Budget session.

Tax slabs serve as the threshold limit beyond which a person needs to pay a specific rate of tax to the government. There are four tax slabs based on income levels in India.

This tax slab pertains to those who are below the age of 60. Those earning below Rs 2.5 lakh are not required to pay any tax. Those earning between Rs 2,50,001 and Rs 5 lakh need to pay a five percent income tax (calculated after deducting Rs 2,50,000 from total income). Those with incomes between Rs 5,00,001 and Rs 10 lakh need to pay Rs 12,500, in addition to a 20 percent income tax after deducting Rs 5,00,000 from the total income. Those earning above Rs 10 lakh are required to pay Rs 1,10,000 as well as 30 percent of (total income minus Rs 10,00,000) as income tax.

Those earning above Rs 2.5 lakh annually also need to pay a four percent cess. This cess was renamed health and education cess in the 2018 Budget. The cess is imposed on the total taxable income after deducting the threshold limit. The cess goes to fulfil the education and healthcare needs of the below poverty line (BPL) families.

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The tax slabs are also restructured according to the age group. Those between the age of 60 and 80 need to pay on income tax if they earn less than Rs 3 lakh. Those earning between Rs 3 to 5 lakh need to pay 5 percent of the total income (over and above the threshold of Rs 3 lakh) as income tax as well as a four percent cess. Residents with annual income between Rs 5,00,001 and Rs 10 lakh are required to pay Rs 10,000 plus 20 percent of the total income (after deducting for the threshold limit) as income tax. They are also required to pay a four percent cess. Those earning above Rs 10 lakh every year need to pay Rs 1,10,000 in addition to a four percent cess and 30 percent rate of income tax.

Residents above the age of 80 need to pay no tax if they earn up to Rs 5 lakh every year. However, those earning between Rs 5 to Rs 10 lakh need to pay an income tax rate of 20 percent and a cess of four percent. Anyone earning above Rs 10 lakh need to pay Rs 1 lakh in addition to 30 percent of his income above the threshold limit as tax. They also have to pay a four percent cess.

The interim Budget, presented in February this year, provided major rebates to taxpayers. Rebates partially refund the total tax amount paid to the government. The interim Budget announced a full tax rebate of Rs 12,500 for those earning up to Rs 5 lakh annually. This means anyone earning that much amount each year does not need to pay any income tax.

India does not have a wide tax base as compared to its huge population. However, there has been a considerable improvement in the tax base in the last five years. According to the Central Board of Direct Taxes (CBDT), demonetisation had a positive impact on tax filings, as the total number of taxpayers increased to 6.87 crore in FY2017-18. This was a 25 percent increase in tax filings. According to former Finance Minister Arun Jaitley, India only had 3.8 crore direct taxpayers in 2014, when the Narendra Modi-led government took charge.