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.
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.
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:
|Old Tax Regime||Tax Slabs||New Tax Regime|
|Nil||Up to Rs 2.5 lakh||Nil|
|5%||Rs 2.5 lakh to Rs 5 lakh (tax rebate under Section 87A)||5%|
|20%||Rs. 5 lakh to Rs 7.5 lakh||10%|
|20%||Rs. 7.5 lakh to Rs. 10 lakh||15%|
|30%||Rs. 10 lakh to Rs. 12.5 lakh||20%|
|30%||Rs. 12.5 lakh to Rs. 15 lakh||25%|
|30%||More than Rs. 15 lakh||30%|
Also Read: Section 194C: TDS On Advertisement
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.
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.
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.’
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.
It is not possible for any system in this world to be flawless. Thus, here are some disadvantages of imposing progressive tax rates.
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.
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.
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.
Ans: Under a flat tax system, there is an identical tax rate for all taxpayers in the nation, regardless of tax-paying capability. Thus, no matter what the taxable income is, everyone pays a single tax rate.
Ans: Which taxation system is better and fairer is an ongoing debate. Both these systems follow a rational economic theory and have their perks and flaws. Thus, one can consider either of them as fair. Meanwhile, based on the category of taxpayers they benefit and segregate, you can also argue that these two systems are unfair.
Ans: Some critics do argue that this system favours low-wage earners and remains biased against rich people. However, it allows those with more income to indirectly use their money to fund development projects for the general public. Thus, it is more beneficial for the greater good.
Ans: There are over 20 countries in the world that impose a single tax rate on all of their tax-paying population. Russia, Serbia, Ukraine, Hungary, and Romania are amongst these 20 nations. Greenland imposes one of the highest tax rates of 45%.
Ans: The main difference lies in changes in slab rates. In the new regime, the government added three more income categories. Furthermore, if persons opt to avail of this new system, they cannot claim various tax deductions and exemptions.
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
|Section 194IB||Section 44AA||Section 80E|
|Section 195||Section 80EEA||Section 80DD|
|Section 80CCC||Section 80GG||Section 80 G|
|Section 54F||Section 1941A||Section 10|
|Section 194Q||Section 192||Section 269SS|
|Section 80DDB||Section 44AD||Section 194C|
|Section 194A||Section 194H||Section 80D|
|Section 80C||Section 80C, 24(b), 80EE & 80EEA||Section 234A|
|Section 50C||Section 80C||Section 80EEA|
|Section 194B||Section 194J||Section 206C|
|Section 80CCG||Section 80 EEB||Section 24Q|
|Section 40b||Section 194C||Section 54EC|
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