Income Tax India – Incomes Tax Rates and Departments

Income taxes or taxes levied on the income of an individual or any legal entity have been there for hundreds of years. They are a form of direct taxes. Income taxes can be classified as progressive, regressive or proportional and can be broadly divided into individual or personal income tax and corporate income taxes.

Income taxes or taxes levied on the income of an individual or any legal entity have been there for hundreds of years. They are a form of direct taxes. Income taxes can be classified as progressive, regressive or proportional and can be broadly divided into individual or personal income tax and corporate income taxes.

The rationale of an income tax was mainly to garner up resources or wealth for a government or polity as a part of a ‘tribute’ or ‘tithe’ paid by the citizens. The tax on ones own personal income or income taxes collected by the government was later understood to be an integral part to raise resources for the government to carry out various developmental, infrastructural and nation building activities.

In the Indian context, all income except agricultural income is treated as taxable income under the Income Tax Act of 1961. Income tax is administered by the Central Board of Direct Taxes (CBDT), Income Tax Department, Department of Revenue, Ministry of Finance under the Government of India. According to the rules, every “assessee” having income above the “exemption limit” is taxable according to the rates charged by central government in line with the Finance Act regulations.

For purposes of administration of income tax, individuals may be classified as residents, non-residents or not ordinarily resident in India. Non-residents enjoy greater benefits than not ordinarily residents in India who may have to pay taxes on their foreign income if it arises from a business controlled in or profession set up in India. The Government of India has entered into agreements with many national governments over the years to prevent its citizens being subjected to double taxation in those countries where the foreign income is earned. This is discussed in detail in Chapter XII of the Finance Act.

Different categories of Income Tax exist in India as it may be calculated on the salaries and wages, pensions and gratuities, annuities or bonus, fee and commissions. The assessee may also be charged tax as a part of the gains from business or professions if that is being or has been carried at any time by the assessee over the previous year.

Income tax may also be levied on individual incomes if it is clubbed with other incomes such as with those with the spouse.

According to the Budget Announcement of 2007-08, Personal Income Tax Rates were unchanged but the threshold limit was increased to Rs. 1,10,000 (senior citizens-Rs. 1, 95, 000 and women-Rs.1, 45,000). Maximum amount of deduction in respect of medical insurance premium was raised to Rs. 15,000 (20,00 for senior citizens); Corporate Income Tax Rates were also unchanged and surcharge on all firms and companies with a taxable income of Rs. 1 crore or less was also removed. There were also various tax holiday schemes announced with undertakings in Jammu and Kashmir given exemptions up tom March 31st, 2012. Employees Stock Option Plan was also propsed to be brought under the Fringe Benefit Tax (FBT). The highest tax bracket is 30% with business income taxed at a flat rate of 33% for Indian Companies and 40% for foreign companies.

Some of the other Tax Rates adopted by the governments of different countries across the world include the pay-as-you-go tax on personal income imposed by the Australian Taxation Office, a flat tax on business income and property tax limited to realized potential gains. France adopts a progressive income tax regime where personal income tax is charged at 16% of tax revenue and corporate tax at 12% of tax revenue. Sweden has a taxation system which includes a direct tax paid by the employee with an indirect tax paid by the employer. While the UK also has a progressive tax regime with 20% of tax on direct or earned income from a trade or profession, 32.5% on UK dividends and 40% on other sources of income, the USA imposes taxes in the case of an income event that is the receipt of wages or the realization of capital gains. Some of the countries that do not impose income taxes include Andorra, Bahamas, Saudi Arabia, Bahrain and Uruguay.

The main problem with administration of income taxes, especially in the less developed economies is its implementation. With so many people below the poverty line a majority of the population does not come under the tax net. The general informal nature of the economy also does not allow economists and statisticians to formulate detailed statistics on the specific amount of tax collections. It is also not possible to say what changes will be brought about by minute alterations in the tax rates.

Lastly, income tax rates, being administered at source, being non-transferable gives rise to numerous opportunities to evade taxes by the rich and wealthy in corrupt countries such as India and Bangladesh who resort to dubious means. For all practical purposes, income tax rates should follow a same pattern across all the countries of the world.