Taxpayers earning between Rs 5 lakh & Rs10 lakh a year may be in line for major tax relief with the task force on the Direct Tax Code suggesting halving the tax rate for them to 10%, two persons aware of the matter said on condition of anonymity.

To be sure, this is still just a suggestion & it is not clear whether the Govt, which is very focused on increasing its tax revenue, will accept it.

The task force submitted its report last week & recommended that the Govt. increase the number of tax slabs or tax brackets from four to five, but lower the tax rates for many.

There is no change in the first income-tax slab (up to Rs 2.5 lakh a year), which attracts zero tax. The current second slab (Rs 2.5 lakh to Rs 5 lakh) attracts 5% tax. The task force wants to expand this slab (Rs 2.5 lakh to Rs 10 lakh) & have a 10% tax rate, while retaining the available full tax rebate for those earning up to Rs 5 lakh.

“Effectively, people having income up to Rs 5 lakh will have to pay zero tax. Tax will be charged for income between Rs 5 lakh & Rs 10 lakh at 10% & an individual can save up to about Rs 37,500 a year (at the higher end) under the proposed regime,” one of the persons cited above said. Currently, people earning between Rs 5 lakh & Rs 10 lakh are taxed at the rate of 20%. The proposed third slab (Rs 10 lakh to Rs 20 lakh ) will attract a tax of 20%; it is expected to give a benefit of about Rs 1 lakh to the taxpayer if his or her income is on the upper side, the first person said. People in this slab currently pay 30% (the current slab is Rs 10 lakh & above). The panel has proposed a fourth tax slab of Rs 20 lakh to Rs 2 crore that will attract a tax rate of 30% & the fifth slab, Rs 2 crore & above, will attract a rate of 35%. Under the current regime, the rate is 30% for people whose incomes fall in these slabs. If the proposal of the committee is accepted, a person earning Rs 2 crore will save around Rs 8.5 lakh.

This is, of course, assuming that there are no surcharges on tax. Currently, for instance, people whose incomes fall in the higher tax slabs pay surcharge.

The Central Board of Direct Taxes (CBDT) did not respond to queries. A Govt. official said on condition of anonymity that the report presented by the task force is yet to be evaluated & that it isn’t necessary to accept all recommendations.

The Govt.constituted the task force on the Direct Tax Code in November 2017 to review the existing income-tax legislation & to draft a new direct tax law in consonance with economic needs of the country. “The recommendations have something for every taxpayer. But, exact benefits can be calculated after one is clear whether the panel proposed to remove cess & surcharge or not,” chartered accountant Jitendra Chhabra said. Currently, with surcharges & cess, a person earning over Rs 2.5 crore pays tax at an effective rate of 42.7%.

“Even if there is a small reduction, it will put more money in the individual’s pocket. I guess it will push aggregate demand. This will push up production & can act as the much needed boost for the economy. But this is only one aspect as there are other encouraging news too,” said Sanjay Kumar, senior director, Deloitte Haskins & Sells LLP.

“Overall, the personal tax collections will be down by Rs 50,000 crore or thereabout only on the rate reduction. But the personal income tax is very buoyant at present, & so with growth in economy that gap in tax will be easily filled. Also, the rate reduction will have a salutary impact on compliance, & also economic growth—the Laffer curve effect,” he added. His reference is to Reagan-era economist Art Laffer’s hypothesis that suggests if tax rates are too high, people will no longer be motivated to work harder & earn more because most earnings will be going to the Govt, & instead opt for lower earnings but a better quality of life. Tax rates that are too high, Laffer argued, would therefore actually reduce overall tax revenue of a Govt.

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