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Understanding Progressive Tax

05/Dec/2017
Understanding Progressive Tax

India follows a progressive tax regime. Progressive tax system means that high-income earners are taxed more than low-income ones.

The extent of the progressivity in this tax method depends on how fast the tax rates rise with the increase in income levels. For example, if one tax bracket has a low rate of 5% and a high rate of 30%, and another tax bracket has income tax rates ranging from 5% to 60%, the latter will be considered more progressive.

The following income tax slabs (fiscal year 2017-18) are used in India:

  • for salary earners below 60 years:
Annual Income Tax Rate
Up to Rs.2,50,000 Nil
Rs.2,50,001-Rs.5,00,000 5%
Rs.5,00,001-Rs.10,00,000 20%
Above Rs.10,00,000 30%

  • for income earners between 60 years and 80 years:
Annual Income Tax Rate
Up to Rs.3,00,000 Nil
Rs.3,00,001-Rs.5,00,000 5%
Rs.5,00,001-Rs.10,00,000 20%
Above Rs.10,00,000 30%

  • for income earners between 80 years and over
Annual Income Tax Rate
Up to Rs.5,00,000 Nil
Rs.3,00,001-Rs.5,00,000 5%
Rs.5,00,001-Rs.10,00,000 20%
Above Rs.10,00,000 30%

 

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Why Progressive Tax?

The need of such a tax structure arises due to unevenness in the distribution of income among masses. Last year, only 24 lakh taxpayers out of around 6 crores earned more than Rs 10 lakh (the highest tax slab) in India.

If there were a flat tax rate, the rest of the taxpayers would be charged relatively a lot more in comparison to the super-rich people. Progressive tax systems, thus, reduce tax burdens on the people who find it the most difficult to pay them. These systems leave more money in the pockets of low-wage earners who are likely to spend all of their money and stimulate the economy.

The premise here is that the ones with privilege should pay more. This system has the ability to gather more taxes than flat taxes or regressive taxes, as tax rates are set to increase as income rises. Progressive taxes allow people with large amount of resources to fund a big part of the services all people and businesses rely on, such as roads, hospitals, schools, etc.

On the contrary, critics of progressive taxes consider them to be biased against rich people. These critics believe this tax is primarily a means of income redistribution, based on the myth most taxes are used to fund welfare programs. Although, this is not true. The government usually spends only a small portion on social welfare.

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