Progressive Tax: Meaning, Types and Benefits

Income Tax

Taxation is crucial for nation-building and development. But considering a taxpayer’s ability to pay is crucial for the sake of parity in terms of the tax burden. 

Fortunately, in India, we follow a progressive tax system. What this regime means is that the government imposes higher tax rates on the richer section of society. Thus, high-income earners have to pay more taxes compared to low-income earners. 

So, if you are curious to learn more about how the Indian tax system works, continue reading this article. 

What Is a Progressive Tax System?

A progressive tax system is one in which the tax burden increases with income. Thus, taxation in India takes place by creating tax brackets that distribute taxpayers in categories depending on their annual income. 

In contrast, a regressive tax system puts a lesser tax burden on high-income earners. The tax rates in this system decrease as the taxable amount increases. 

Through a progressive tax system, lower-income families can take home a higher fraction of their income. Thus, they can spend more on purchasing everyday items, improve their lifestyle, and increase economic demand. 

Furthermore, it does not gravely hamper the spending of high-income groups. After paying tax, this group still has enough to afford a satisfactory lifestyle. However, it can reduce the ability to live a luxurious life and make investments. 

Also, the degree of progressiveness varies according to how much tax burden a country imposes on its high-income population. So, if Country A’s tax bracket starts at 5% and goes to 30% and Country B’s bracket starts at 5% and goes to 50%, then the latter is more progressive. 

How Does a Progressive Tax System Work?

The basis of progressive taxation comes from the economic theory of the marginal utility of consumption. It is believed that as the income increases, the level of urgency to spend declines. Thus, individuals can allocate a higher portion of their income towards taxation if they earn more. 

In India, as per the new tax regime, there are seven tax brackets. However, one can opt for the old regime while paying taxes. The income tax slabs for taxpayers below 60 years are as follows:

Also Read: Section 194C: TDS On Advertisement

Advantages of a Progressive Tax System 

There are numerous reasons for opting for this tax system. One can understand the primary benefit of this tax system by its name itself. Here is a list of some advantages a nation enjoys with progressive taxation. 

• Promotes equality

Unequal distribution of income is a sad reality in India. However, reduction in this inequality is what progressive taxation aims to achieve. It reduces tax burdens for those who may not be able to pay them. Thus, it helps them to allocate a higher portion of disposable income towards the cost of living. 

• Stimulates economy

The lower-income groups are more likely to use their net income for purchasing essential items. Thus, by allowing them to disproportionately take more money home, the government stimulates the economy. Moreover, this system reduces the capability of the richer population to indulge in ‘wasteful spending.’

• Higher tax collection 

Compared to flat taxes or regressive taxes, a progressive tax system collects more money from the population. This is because, in this system, the high-wage earners are taxed more. Furthermore, the government uses this higher revenue collection for funding public services and development projects, like education, domestic businesses, transportation, etc. 

Disadvantages of a Progressive Tax System

It is not possible for any system in this world to be flawless. Thus, here are some disadvantages of imposing progressive tax rates. 

• Lower government revenue 

A system with disproportionate tax rates may disincentivise individuals to work hard and reach higher income brackets. It might make one wonder why they should work harder to achieve an income on which they will have to pay 30% tax. Thus, this can end up reducing the government’s overall revenue generation. 

• Tax evasion

Not only can this system discourage individuals from earning more, but it can also stimulate tax evasions. The high wage earners might indulge in hiding their wealth in order to pay fewer taxes. On top of this, they might move abroad to evade taxation completely. 

Also Read: Deductions Under Section 80C Of The Income Tax Act

Final Word

Despite a few flaws, a progressive tax is seen as the best representation of equality. It is popular amongst various nations in the world, like India, the USA, South Africa, Sweden, etc. Indeed, it is not proportional, but it is designed to bring parity to the spending capacity of all taxpayers. Furthermore, the higher tax collection is useful for nation-building. 

FAQs On Progressive Tax

Before you go…

• Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Get personal loans up to ₹20 lakh starting at 9.9% p.a. Install the Navi app now!!
• Or, maybe you’re looking to buy that house you’ve been eyeing 🏠 and you need a loan of up to ₹5 crore. Install the Navi app now and get instant in-principle approval right away! Interest rates starting at 7.89% p.a.
• How about an affordable health insurance policy👨‍⚕️ starting at a monthly premium of just ₹235? Install the Navi app now and get your policy in under 2 minutes.
• Instead, want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research. Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.