Pacific Business Review International

1 Volume 5 Issue 7 (January 2013)

Personal Income Tax Structure In India:

An Evaluation
Dr. Radha Gupta*

In the present paper an attempt has been made to throw light on prevailing personal income tax structure in
India. The paper briefly analyses the issues relating to high tax burden on people falling under low and medium
income groups. Researcher concludes that their is still a need to bring more reforms in the personal income tax
structure in the form of broadening the exemption limits, lowering the tax rates, reorganizing the different
income tax slabs and simplify overall tax procedure so that people could be encouraged for compliance of tax
laws.
Keywords: Structure, Slabs, Reorganizing, Exemptions, Broadening.

Introduction distribution.(Sahota,1961) Another common and most

empirically used way to understand its role is the ratio of
As per Income Tax Act 1961, every person (Individuals,
personal income tax to total tax revenue and national
Companies, Hindu undivided families, Firms, Cooperative
income.(Agarwal,1991) A good tax system is characterized by
Societies and all other artificial judicial persons) whose total
a high responsiveness of tax revenue to changes in income of
income exceeds maximum exemption limit is liable to pay
public bodies or national income; the technique of measuring
income tax at the rates prescribed in the act. It is not a
this response is tax elasticity and tax buoyancy. Tax policy
voluntary payment but an enforced contribution that is why
forms an important part of development process in a
tax is known as financial charge or levy. Despite the fact that
developing economy. The total tax revenue is dependent upon
money provided by taxation is used to carry out many
three variables viz., tax rate, tax base, and national income.
functions for the welfare of the society, it usually gives a feeling
(Ankita, 2009) Tax reforms sometime bring changes in
of displeasure to tax payee. Actually, tax payer does not want
taxation system. A tax payer sometime finds it difficult to
that his hard core earned money should be taken away from
understand whether change in tax liability is due to legislative
him. History is witness that there is always a struggle between
change in the federal tax code or shift in his or her own
tax payer and tax collector. This may be due to the irrational
circumstance. (Troy et all) There has been change in Personal
structure of Personal Income tax. The tax rates, tax base and tax
income tax rates, tax brackets and rate of surcharges from time
slabs in Personal Income Tax schedule were exorbitantly higher
to time. As rates remained stable since 1997–98, at 10, 20, and
by any standards during the period under review. The need for
30%, with some changes in the associated tax brackets. A
rationalization of tax structure was felt long back but very little
surcharge of 5 % of the income tax payable was imposed in
reform has been seen so for.
2002–03 in the wake of the Kargil war and was discontinued
Review of literature the following year. It was replaced, however, with a separate 10
% surcharge imposed on all taxpayers with taxable incomes
It is a matter of general belief that taxes on income and wealth
above ` 850,000; the level was raised to ` 1million in the
are of recent origin but there is enough evidence to show that
2005–06 budgets. (Rao en all)
taxes on income in some form or the other were levied even in
primitive and ancient communities.(IT circular, 2010). India Objective of the Study The objectives of the study are
has a tax charter with three-tier federal structure (Union, state
governments. & local bodies). (Bernardi, 2005) The rapid 1. To measure the trend of personal income tax structure in
changes in administration of direct taxes, during the last India.
decades, reflect the history of socio-economic thinking in 2. To determine the present scenario and future prospects of
India. (CBDT report, 2009) Governments use different kinds prevailing income tax structure.
of taxes and vary tax rates because taxes are one of the
significant sources of revenue. (Asia trade hub .com) Quite 3. To suggest suitable measures for rational personal income
apart from its role of raising revenue, the personal income tax tax scheme.
has long been regarded as a potent weapon of effecting Limitations and Scope of the Study
distributive justice (Nayak, 1989). Secondly, it is an
instrument of equity, social justice and income Personal income tax in India may be said to consist of taxes on
*Assistant Professor, Baba Ghulam Shah Badshah University, Rajouri. Jammu and Kashmir
Pacific Business Review International 2
the non-agricultural incomes of three types of assesses: 1. Composition and comparative analysis of income
Individuals, Hindu Undivided families, unregistered firms and exempted from tax.
other associations of persons. However, present study is
2. Composition of total tax liability of general tax payer for
confined only to general tax payers. Hence, there is further
period under review.
scope of study.
3. Composition of growth rate of tax burden.
Research Methodology
4. Composition of tax liability on different income slabs.
Present study is descriptive and exploratory in nature. Here
researcher has taken 12 financial years (2000-2001 to 2011- 5. Conclusion and suggestions.
2012) personal income tax rate and calculated tax burden
Composition and comparative analysis of income exempted
accordingly. Various books on direct taxes, indirect taxes,
from tax.
public finance, circulars of CBDT, reports in newspapers,
research papers in journals and magazines, statistics based on Table1.under reference depicts tax free income of male, female
various issues of economic survey of govt of India, various and senior citizen. Study shows that exemption limit remained
internet sites, and other relevant literature were consulted. constant for first six financial years under review, despites
Guidance of the experts in the field and view of public is also raising cost of living and additional requirement for better life.
considered for carrying out the study. Although the increased proportion of tax free income
thereafter is significant but the pace has not been in
Present study has passed through the following stages:
consonance with raising prices all around.

Table 1.
Tax Free Income for Male, Female and Senior Citizen
Financial Year Male Female Senior citizen
2000-01 50,000 50,000 50,000
2001-02 50,000 50,000 50,000
2002-03 50,000 50,000 50,000
2003-04 50,000 50,000 50,000
2004-05 50,000 50,000 50,000
2005-06 50,000 50,000 50,000
2006-07 100,000 135,000 185,000
2007-08 110,000 145,000 195,000
2008-09 150,000 180,000 225,000
2009-10 160,000 190,000 240,000
2010-11 160,000 190,000 240,000
2011-12 180000 190000 250,000
(Source: Data compiled from budget highlights given in newspapers)

In the year 2011-12, a new category called “Very senior citizen” category of assesses is ` 500,000, thereafter they have to pay tax
has been added for people above 80 years. Now we have two according to prevailing tax rates. Interesting point here is that
types of senior citizens “Senior citizen” up to 60 years of age higher the amount of income exempted from tax, lever the
and 'Very senior citizen in the age of 80 year or above. The number of individual who will fall in the last category
threshold limit of income exempted from tax for newly created
3 Volume 5 Issue 7 (January 2013)

Figure1. Income exempted from tax

Amount

Financial Year s

2. Composition of total tax liability of general tax payer for period under review

Table 2.
Trend of Tax Rates and Tax Liability for General Tax Payers
Financial Income Rate Liability Income Rate Liability Income Rate Liability
Years (in ) (In ) (in ) (in ) (in ) (In )
2000-01 50,001 to 10% 1000 60,001 to 20% 18,000 150,001 to 30%
60,000 150,000 900,000 135,000
2001-02 50,001 to 10% 1000 60,001 to 20% 18,000 150,0001 to 30% 135,000
60,000 150,000 900,000
2002-03 50,001 to 10% 1000 60,001 to 20% 18,000 150,001 to 30% 135,000
60,000 150,000 900,000
2003-04 50,001 to 10% 1000 60,001 to 20% 18,000 150,0001 to 30% 180,000
60,000 150,000 900,000
2004-05 50,001 to 10% 1000 60,001 to 20% 18,000 150,00 1 to 30% 180,000
60,000 150,000 900,000
2005-06 100,001 to 10% 5000 150,001 to 20% 20,000 250,001 to 30% 225,000
150,000 250,000 900,000
2006-07 100,001 to 10% 5000 150,001 to 20% 20,000 250,001 to 30% 225,000
150,000 250,000 900,000
2007-08 110,001 to 10% 4000 150,001 20% 20,000 250,001 to 30% 225,000
150,000 to250,000 900,000
2008-09 150,001 to 10% 15,000 300,001 to 20% 40,000 500,001 to 30% 150,000
300,000 500,000 900,000
2009-10 160,001 10% 14,000 300,001 to 20% 40,000 500,001 to 30% 150,000
to300,000 500,000 900,000
2010-11 160,001 10% 34,000 500,001 to 20% 60,000 800,001 to 30% 60,000
to500,000 800,000 900,000
2011-12 180,001to 10% 32,000 500,001to 20% 60000 800,001 to 30% 60,000
500,000 800,000 900,000

(Source: Data compiled from newspapers and direct tax reports)

Pacific Business Review International 4
Composition of total personal income tax liability (tax on all period under review indicates that those who fall in the low and
the three slabs in each financial year) of individual tax payer medium income group are highly taxed than their
from FY 2000-01 to 2011-12 is shown in table 2. Here taxable counterparts who are in the third income bracket.
income up to ` 900,000 is taken into consideration and tax Furthermore, the growth rate of total tax load, which is given in
load on each slab is calculated accordingly. Tax liability on first table 3, varies between 27.11% to16.88% between 2000-01 to
income bracket varies between `1000 to ` 32000 for entire 2011-12. Keeping in view the growth rate of taxes on first and
period under review. In case of second income bracket, it is ` second income groups there is ample justification to say that
18,000 in 2000-2001 and 60,000 in 2011-12. Surprisingly, in there is need to bring reform in prevailing personal income tax
case of third income bracket, liability is maximum in the structure in the form of lower tax rates. Due to inflationary
beginning (` 135,000) and minimum in the end (` 60,000). tendency in the country, those who fall in tax bracket feel
However, total tax load is showing decreasing trend but this is double snag, which can affect adversely their sustainability on
one side of the coin because those who fall in the third income the one hand, and willingness to contribute for tax payments
bracket are people with high income level. Increasing trend of on the other.
tax load in case of first and second income slabs during the

3. Composition of growth rate of tax burdenfrom2000-2012

Table.3
Growth Rate of Tax Liability (2000-01 to 2011-12)
Financial Tax load on Tax load on Tax load on Total tax load Total taxable Tax liability
Years first slab(in ) second slab third slab (in ) income in ( ) (in %)
(in )
2000-01 1,000 18,000 225,000 2,44,000 9,00,000 27.11
2001-02 1,000 18,000 225,000 2,44,000 9,00,000 27.11
2002-03 1,000 18,000 225,000 2,44,000 9,00,000 27.11
2003-04 1,000 18,000 225,000 2,44,000 9,00,000 27.11
2004-05 1,000 18,000 225,000 2,44,000 9,00,000 27.11
2005-06 5,000 20,000 195,000 2,20,000 9,00,000 24.44
2006-07 5,000 20,000 195,000 2,20,000 9,00,000 24.44
2007-08 4,000 20,000 195,000 2,19,000 9,00,000 24.33
2008-09 15,000 40,000 150,000 2,05,000 9,00,000 22.77
2009-10 14,000 40,000 150,000 2,04,000 9,00,000 22.66
2010-11 34,000 60,000 60,000 1,54,000 9,00,000 17.11
2011-12 32,000 60000 60,000 1,52,000 9,00,000 16.88
(Source: Data compiled from information given in table 2.)

Composition of tax liability on different slabs for the period changed but by and large in our country people fall in first two
under review slabs according to their income labels and they are known as
Aam Adami. Tax burden on different slabs gives us a different
In this section, the researcher has calculated tax load on
picture and this is virtually a clear position because those
different slabs, which is shown in table 4, and their growth
assesses whose incomes cover all the three slabs are people with
rates in corresponding tables. Though time to time
high income level and those who fall in first and second tax
composition of sum covered, in different tax, slabs have been
brackets are middle income group people.
5 Volume 5 Issue 7 (January 2013)

Table. 4
Tax Weight on General Tax Payer of Different Slabs
Financial Year Tax burden on Tax burden on Tax burden on
First slab Second slab Third slab
2000-2005 1,000 18,000 225000
2005-2007 5,000 20,000 195000
2007-2008 4,000 20,000 195000
2008-2009 15,000 40,000 150,000
2009-2010 14,000 40,000 150,000
2010-2011 34,000 60,000 60,000
2011-2012 32,000 60,000 60,000

Table 5.
Trend of Tax Load on First Slab
Financial Year Growth rate (In %)
2000-2005 ---
2005-2007 400
2007-2008 300
2008-2009 1400
2009-2010 1300
2010-2011 3300
2011-2012 3100
(Source: Data in Table 4)

Tax toll is quite heavy on those who fall in first tax bracket, incomes earned by assesses and degree of tax imposed on them.
which is portrayed in the form of corresponding high growth Proper care therefore is, needed on the part of tax
rate in tax burden, in table 5. Continuously higher dose of tax administration to have low tax liability at lowest level so that
on low income is exposing inverse relationship between people should act in accordance with tax law.

Table 6
Trend of Tax Load on Second Slab
Financial Year Growth rate (In %)
2000-2005 ---
2005-2007 11
2007-2008 11
2008-2009 122
2009-2010 122
2010-2011 233
2011-2012 233
(Source: Data in Table 4)
Pacific Business Review International 6
Situation is not much different for those who get under next Smith. An important task, therefore, before tax administration
tax bracket but the only difference in this case is that tax toll is is to design the rate schedule that should be equitable and
increasing at slightly lesser speed than their counterparts are. efficient otherwise people will start following unethical
Overall tax liability on lower and middle income groups is practice in the form of tax evasion, which could have negative
higher than high earning people in the country, which is the impact in the growth story of the country.
violation of “Equity Principle” of taxation given by Adam

Table 7.
Trend of Tax Load on Third Slab
Financial Year Growth rate (In %)
2000-2005 ---
2005-2007 -13
2007-2008 -13
2008-2009 -33
2009-2010 -33
2010-2011 -73
2011-2012 -73
(Source: Data in Table 4)

Comparatively, third tax bracket carries less tax toll than first References
and second slab. Table 7 under reference depicts that growth in
Acharya Sukhander: Tax Planning under Direct Taxes,
tax burden is 33% in 2003-04 and it has been reduced
Allahabad: Modern Law publication.
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and their range fairly large to minimize the distortion arising Personal Income Tax, Economic and Political Weekly, July
out of bracket creep. Findings of many researchers have shown 20.
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Bernardi, L and Franschini, A. (2005). Tax system and tax
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reform in India working paper n. 51.
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