Higher exemption limits and wider tax slabs granted in the last five years have reduced personal income-tax for many tax payers. But these tax breaks have not kept up with inflation. In real terms, tax payers are worse off.
Individuals with an annual income of Rs 2 lakh paid Rs 5,150 as tax five years ago. Today, they suffer no tax. Yet, this has meant just a 0.6 per cent annual growth in disposable income (income net of taxes) in the lowest income bracket.
Inflation, as measured by the Consumer Price Index, has galloped at an annual rate of 9.5 per cent in this period.
Of course, it helps if you are in the ‘bulge’ bracket of incomes.
Not only can the assessee ward off the inflation threat with a higher disposable income, the taxman too is a bit more considerate.
People in the higher tax brackets have reaped more benefits than lower income earners, from tax breaks. But disposable income in this category has also failed to compensate for inflation.
In 2008-09, at a tax rate of 30 per cent, individuals with an annual income of Rs 10 lakh paid around Rs 2.11 lakh as tax. But for the current financial year, people in this category are liable to pay only Rs 1.34 lakh as tax. After adjusting for the changing tax rates, disposable income in the Rs 10 lakh bracket has increased at an average rate of 2.4 per cent in the last five years.
Marginal rise in tax base
The cuts in tax rates over this period have not materially increased the number of tax payers either. The report of the Standing Committee on Finance puts the number of tax payers in 2011-12 at 3.24 crore. This is only a 3.5 per cent addition to the tax base of 3.13 crore tax payers five years ago.