Tax rates are rates of levies which are imposed by the state or national government on incomes, sales or movement of a particular commodity, house or any other commercial property, capital gains and on entertainment within the periphery of the state. Tax rates can mainly be of three types: progressive, regressive and constant. Progressive taxation or taxes which increase with the income levels are adopted in most of the countries across the world. Regressive taxation implies taxes falling with increase in income levels whereas a constant or flat rate of taxes are found in many states in the USA which refer to a uniform rate of taxation for all categories or all income brackets.
Taxes can be broadly be classified into direct or indirect taxes. Direct taxes are taxes where it is not possible to shift the “incidence of taxation” to others thus having a low tax avoidance rate. Income Taxes fall under this category. Incidence or the burden of taxation on indirect taxes such as Sales Tax can be passed on to the buyer of the commodity. It should be noted that, rates on indirect taxes are much less than that on direct taxes.
India has a well defined and clearly demarcated tax structure which can be summarized as follows:
- Personal Income Tax is administered by the Central Board of Direct Taxes (CBDT) under the Income Tax Department, Dept. of Revenue, Govt. of India which ranges from 0%, 10%, 20% and 30% for annual income levels up to Rs. 1 lakh, Rs. 1 lakh-1.5 lakhs, Rs. 1.5 lakhs to 2.5 lakhs and Rs. 2.5 lakhs and above respectively. An additional surcharge of 10% is levied on total taxes if annual incomes are Rs. 8.5 lakhs and above.
- Corporate taxes or taxes on corporate income are also administered by the Central Govt. on the basis of income arising from domestic and foreign sources. Domestic Corporations are taxed at a basic rate of 35% with an additional surcharge of 2.5% with the corresponding statistics for foreign corporations at 40% with the surcharge levels being the same. In addition, an education cess the rate of 2% is levied on both the entities. Besides, domestic corporations also have to churn out a dividend distribution tax at the rate of 12.5%. there is the provision for corporate organizations to pay a Minimum Alternative Tax at 7.5% (plus surcharge and education cess) of book profit as tax, if tax collections garnered through regular means amounts to less than 7.5% of the book profits.
- Agricultural Income is not subject to income taxes as per the Income Tax Act of 1961.
- Tax on long-term capital gains for capital assets held over three years and shares or equities listed on a recognized stock exchange in India are fixed at the basic rate of 20%. However, capital gains arising from sale of equity shares or units of mutual funds are exempt from tax.
- Sales taxes which constitute the majority of indirect taxes are under the jurisdiction of the respective state governments. Sales tax are levied on the sale of goods which creates a gap between the price received by the producer and that paid by the consumer. Sales taxes have been replaced by Value Added Tax in most of the states which provides for compensation of taxes paid by each producer at every stage of sale of the product or its intermediary. VAT rates have been fixed at 0% for essential commodities and 12.5% on most articles and are operational in 15 states of India. Besides, state governments are also empowered to levy taxes on agricultural income besides property taxes and taxes on entertainment. An octroi duty is imposed by municipalities for the entry and exit of goods to and from the area. In this context, it should be noted that Central Sales Taxes (CST) have been reduced to 4% according to the Budget Announcement of 2007-08.
- Indirect taxes imposed by the central government include excise duties being charged for the manufacture of the product giving the product a particular name, character and marketability. The Central Board of Excise and Customs administers the system and charges a 16% excise duty on most goods although some articles attract an additional 8% excise duty. Service taxes which are also administered by the mentioned authority is levied at the rate of 10% (plus 2% education cess) for certain identified services. Any service rendered in India which is remunerated in foreign dollars and which is not repatriated outside the country is exempt from service tax.
In case of the USA, income tax rates are administered by the different state governments as a result of which state income taxes differ across the different states of the country. As of Jan 1st, 2007, it were the highest for Vermont with the highest tax rates at 9.5% with incomes being divided into 5 brackets. Illinois and Indiana have the lowest flat at 3% and 3.5% respectively. The personal exemption granted ranges from $2000 to $4000 to $2000 for a single to a married individual to one having a child respectively. State income TR can be said to be the most reasonable for Alabama with tax rates ranging from 2% to 5% with only three income brackets which provides for simplicity of computation for the government officials. California has one of the most skewed tax rates in the country with income tax rates ranging from 1% to 9.3% with 6 income brackets. Mississippi provides for the greatest tax exemptions for married individuals with $12000 whereas Wisconsin offers only a tax exemption of $1400. New Jersey can be said to have a very progressive tax structure ranging from 1.4% to 6.97% with 6 income brackets. Seven states choose to have no state income taxes; they are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
But Federal ITR administered by the Internal Revenue Service also exist which have to be filed all the citizens of the country which has a progressive tax rate from 10% to 15% to 25%, 28%, 33% and 35% respectively as income rises from the threshold level of $7550. These will differ when people file joint or separate returns or in case of taxes levied on head of a household.
In both the cases of India and the USA similar tax exemptions are allowed like contributions to pension funds and trusts or charities. Capital losses are exempt from taxes in the Indian context and several itemized and non-itemized contributions are exempt from income taxes in the US. These may include earnings from life insurance contracts, casualty losses and interest paid on mortgage. Gratuities, commuted pensions, payment received on Voluntary Retirement Section and annual accretion to Provident Fund account are exempt from income taxes in case of India.
In case of the UK, income taxes are administered by Her Majesty Department of Revenue and Customs (HMRC) and various tax allowances are offered depending on the income and age of the individual. They do not differ across different states and counties. Income tax allowance was offered for 5,035 pounds annually for the year 2006-07 for individuals up to 65 years of age. Tax allowances for persons over 65 was minimum at 7,280 pounds annually which would increase further for individuals over 75 years of age. ITR in the UK are of a progressive nature ranging from 10% to 40% in case of earned income and it the same for savings. Income tax rates on dividends range from 10% to 32.5%. On the front of sales taxes, most of the sales taxes have been replaced by VAT whereas some on the sale of Intellectual Property still exist.
Tax rates for different categories of taxes differ across countries of the world and in many cases certain taxes which do not find a place in the domestic country are levied rampantly in other countries.