Just days before the budget was presented, there were rumors that the salaried class will see an increase in their tax rates. These rumors were then addressed by many at the Q-block that this was not going to be the case. There were even news reports that Prime Minister had asked the Finance Ministry to not consider any additional tax on the salaried people. As the budget speech is given and the dust has settled, this class will be targeted yet again by all intents and purposes.
It seems like the salaried class of the country is stuck in a tug of war. At one hand, the IMF is asking the government to increase tax revenues while the government was looking to avoid any such measures. Now that the speech has been given, it seems that the crushing inevitability has become a horrible nightmare.Â
In the speech, the minister admitted that corporate tax was where it should be as it had come through reforms in the last 4 years. There was a need to address the personal income tax now in order to bring it closer to international standards. What these salaried people get in return does not seem to be at par with international standards but then again its not like they are being listened to particularly.
The proposals of the last budget meant that anyone earning an annual income of 600,000 or monthly income of Rs. 50,000 was not going to see any of their salary deducted in the form of income tax. The slab has been maintained and it seems that people earning below this threshold will not see their tax expense increase.
Once the salary goes past that threshold, it can be seen that from Rs. 600,000 to Rs. 1,200,000 is taxed at a rate of 5% for any income past the Rs. 600,000 limit. This used to be 2.5% according to the last budget. Consider someone earning an annual income of Rs. 1,200,000. Previous year, the person was giving total tax of Rs. 15,000 which will increase to 30,000. This becomes an effective tax rate of 1.25% which will increase to 2.5%. In terms of increase, these employees see a doubling of their tax expense.
When the income is doubled from Rs 1,200,000 to Rs 2,400,000, it can be seen that the employee was giving a tax of Rs 165,000 according to the previous regime which will increase to Rs 230,000 according to the proposed tax. This would take the effective tax rate from 6.9% to 9.6% which is an increase in tax amount of almost 40%.
The slabs between Rs. 600,000 and Rs. 2,400,000 seem to be facing the most of the tax expense increase as all the slabs in between seen an increase in their tax expense of almost 40%. This would mean that their disposable income will be expected to fall. In the face of a tax heavy budget, these employees might seem their purchasing power hit further with the inflation that can be expected in the coming year or so.
Going higher on the slabs, as the annual income increases to Rs 3,600,000, the tax expense goes from Rs 435,000 to Rs 550,000. This leads to an effective tax rate going from 12.1% to 15.3%. In terms of increase, this is a further increase of 26.4%. As the income reaches Rs 4,800,000, the tax expense goes from Rs. 765,000 to Rs. 945,000 which takes the effective rate from 15.9% to 19.7%. This is an increase of 23.5% in terms of rate of increase.
As income reaches Rs 6,000,000 on an annual basis, the tax expense was Rs. 1,095,000 which would be Rs. 1,365,000. This would mean that an effective tax rate of 18.3% will go to 22.8%. The employees would see an increase in expense of 24.7%. Even though the increase for the tax slabs between Rs 1,200,000 and Rs. 6,000,000 has decreased, they are still seeing an increase in their tax expense of more than 25% which means that they will bear some of the pain of the new taxation policy.
As the tax slabs keep increasing, the rate of increase falls in terms of the expense being borne by the employee. At an annual salary of Rs. 12,000,000, the employee used to pay tax of Rs. 3,195,000 and will now end up paying Rs. 3,465,000. This takes his effective tax rate from 26.6% to 28.9%. In terms of increase, this is only an increase of 8.5%. The last slab covered by the law is for people earning more than Rs. 24,000,000 annually. They will see their tax expense increase by 3.7% from Rs 7,395,000 to Rs. 7,665,000. Their effective tax rate will go from 30.8% to 31.9%.
