By Vikas Vasal
30/7/2009
Every year there is lot of expectation from the Budget by the common tax payers.  Individuals, whether employed or self employed, constitute a large percentage of the overall tax compliant population.  India has witnessed reduction in overall tax rates over the past few decades which in-turn has resulted in increased compliance and more revenue for the government.
Due to global economic slow-down, there has been increased pressure on the average household income and expenditure; therefore, there is a general expectation to provide some relief from tax this year in the current year’s budget. 
Rationalization of tax slab rates and reduction of tax is a fundamental issue and not just restricted to the current year’s budget.  In this context, three points merit attention:
-    First, revising the slab rates upwards;
-    Second, reducing the number of slab rates – currently three; and
-    Third, reduction in the peak tax rate.
It would be prudent to look at the global landscape as to how personal tax rates have evolved over years, before a case could be argued for rationalization of the same in India.
Global Scenario
In general, there is a slow global decline in top personal income tax rate from an average of 31.3% in 2003 to 28.8% in 2008.  However, specific regional and country level analysis varies considerably and needs to be factored into, before building any scenario. 
European Region
Prima facie, highest personal income taxes in the world are payable by the citizens of European Union.  Also, there has been steepest fall in the average rate of tax from 41.5% in 2003 to 36.4% in 2008 in this region.  In this context, few notable examples include France, where significant cut from 48.1% in 2003 to 40% has been made in 2008 and similarly, Germany where top tax rate has been reduced from 48.5% to 45% during this period. 
Single / Flat rate of tax
One of the most significant developments in the last few years has been the introduction of flat rate of tax in Europe.  It is pertinent to note that flat rate of tax which has been introduced in few European countries is at a much lower level than the highest variable tax rate thereby reducing the overall tax impact for the individuals.
So far, many Eastern European States have moved forward in this direction.  These include Estonia where rates have fallen from 26% in 2003 to a flat rate of tax of 21% in 2008, in Slovakia from 38% to 19% and in Romania from 40% to 16% during the same period.  Also, two noteworthy examples of flat rate structure are Czech Republic with a flat tax rate of 15% and Bulgaria with a flat tax rate of 10%.
Amongst highest individual tax payers on certain types of income include people from Denmark where the top tax rate is 59%, followed by Sweden 55% and Netherlands 52%.
Asia Pacific Region
After the Europeans, in general, the highest tax is paid by people in the Asia Pacific Region.  Also, there has been a general decline in tax rates from 36.4% in 2003 to 34.6% in 2008 in this region.  Incidentally, the big emerging economies of China and India have not seen significant change in the tax rates over this period, whereas other emerging economies have reduced their top tax rates.  For example, Vietnam has reduced its top tax rate from 50% in 2003 to 40% in 2008.
In India, the highest tax rate is 30% and with surcharge at the rate 10% and education cess at the rate of 3%, it effectively works out to 33.99%. 
Few striking examples in Asia Pacific Region include countries like Hong Kong with tax rate of 16% since 2003 and Singapore with a tax rate of 20% since 2006.  The highest rate of tax in this Region is charged by Japan at 50% followed by Australia and China at 45% on income above certain threshold.
Latin America Region
Personal income tax rate in this Region has stayed low but relatively stable averaging at 25.6% in 2003 and rising to 26.9% in 2008. This was mainly due to introduction of individual income-tax in 2007 in Paraguay at the rate of 10% and in Uruguay at the rate of 25%.  Thus, the tax rates have remained stable in Latin America Region or are being reduced.  For example, in Panama tax rates have been reduced from 33% in 2003 to 22% in 2008 and in Mexico from 34% to 28% during the same period.
BRIC comparison
In 2008, amongst the BRIC countries, Russia took the lead with lowest individual tax rate.  Russia levied a flat tax rate of 13%, while Brazil levied the top tax rate of 27.5% at income level of BRL 32,919, equivalent to Rs 8 lakh approximately.  
In comparison India’s top tax rate is 30% (effective top tax rate is 33.99%), while in China, the top tax rate of 45% gets triggered at an income level of CNY 100,000 of monthly income, equivalent to Rs 7 lakh approximately of monthly taxable income. 
It is pertinent to note that the top tax rate in all the BRIC economies have remained unchanged during the period 2003-2008. 
Income threshold.
The country’s highest tax rate is only one indicator of what individual’s pay as tax on their income.  An equally important aspect is the income threshold above which the highest tax rate is charged.
It is pertinent to note that in India the highest tax rate of 30% is triggered at a relatively low level of income of Rs 5 lakh.  In comparison, in the US, the highest tax rate of 35% gets triggered at income over $357,700 equivalent to Rs 160 lakh approximately. Similarly, in Singapore, the top rate of tax 20% is payable only on income over SGD 320,000 equivalent to Rs 100 lakh approximately.
India - Way forward
Overall, taxes on personal income are on slow decline in many countries, which is akin to fall in corporate income-tax rates across the globe.
Keeping in view the global trend of rationalization and reduction in tax rates, it may be an appropriate time for India to consider reducing the slab rates from three to two and may be gradually to one.
Also, reducing the highest tax rate from 30% to 28% initially and gradually to 25% will make India’s top tax rate to be more competitive in comparison with other progressive economies.  Further, increasing the threshold limit for top tax rate from Rs 5 lakh to Rs 10 lakh in near future will only be reasonable. 
These steps will help provide more disposable income in the hands of the individuals and hence boost consumption, savings and investments in the economy which in turn would help India to continue to grow and achieve its GDP growth targets!

The author is executive director with consultancy firm KPMG India Pvt. Ltd. These are his views.