Can India transition to a single income tax rate?
The slab rate system of taxation has been a cornerstone of India’s tax framework since its inception.
Inspired by developed nations, this progressive tax system is designed to promote fairness by imposing incrementally higher tax rates on higher income brackets.
For instance, an individual earning ₹5,00,000 pays tax at 5%, while someone with an income of ₹7,00,000 is taxed 5% on the first ₹5,00,000 and 20% on the additional ₹2,00,000. This ensures a degree of equity as individuals with higher incomes contribute more in taxes.
However, the introduction of dual tax regimes—one catering to individuals who claim deductions and another for those opting out—has introduced significant complexity. Additionally, special tax rates ranging from 12.5% to 30%, applicable to various income streams such as capital gains and cryptocurrencies, further complicate compliance, making the tax landscape more challenging for taxpayers to navigate.
Also read: Can gifting assets to family members enhance tax efficiency?
While progressive taxation is widely practiced, including in developed countries like the USA and UK, it has its share of criticisms. In India, factors such as bracket creep, where inflation pushes individuals into higher tax slabs without a corresponding increase in real income, and the complexity of compliance with multiple slabs and deductions have led to dissatisfaction, particularly among salaried individuals.
Many also perceive the system as a disincentive to earn more, as higher incomes are taxed at significantly higher rates, reducing the motivation for increased productivity. Additionally, the impact of higher taxes on disposable income can restrict both consumption and savings, further amplifying discontent. This
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