Taxation Incidence On India's Middle-income Levels High Among Leading Economies: PHDCCI

India is best at providing relief to threshold income levels, however, the incidence of taxation on middle-income levels is high among leading economies, said the PHD Chamber of Commerce and Industry (PHDCCI) in a report.

The report on “Incidence of Taxation in the Leading Economies” stated that India does not levy any tax on threshold income levels upto Rs 2,50,000 and economies such as France, Germany, United Kingdom and Brazil also do not levy any tax on their threshold income brackets. 

Whereas, some leading economies like the United States (10 per cent), Canada (15 per cent) and Italy (23 per cent) levy high tax rates on threshold income levels, said the analysis report.

"Though the new tax regime in India lowers the tax burden on the middle-income class to some extent by applying peak tax rates to income above Rs 15,00,000 (as the peak tax rate was applied to income above Rs 10,00,000 in the old tax regime), still, the middle-income class is subject to the peak tax rate of 30 per cent which is very high as compared to other leading economies," said Saket Dalmia, President, PHDCCI.

Dalmia said that in other leading economies, the middle-income class though pay high tax but the same is not subject to peak tax rates.

In the light of persistently higher inflation levels and in order to provide relief to the lower and middle-income class, many leading economies have indexed the threshold income brackets to respective rates of inflation, said the industry body

Notably, income-tax thresholds in 2023 are set to increase by 5.4 per cent in France to match inflation. Tax brackets in the US have an upper limit of 7 per cent higher than the brackets for 2022. 

In Canada, all five federal tax brackets for 2023 have been indexed to inflation using the 6.3 per cent rate, said the Industry body.

The threshold to peak rate multiple is highest in the US (37X), followed by China (27X), Germany (27X) and Japan (21X). 

The report added that the higher the gap between threshold and peak income level, the more uniform the distribution of tax burden and the lesser impact on middle-income levels, said PHDCCI

It also stated that in India, the threshold to peak rate multiple is low i.e. (6X). The lower the gap between threshold and peak income level, the more the tax burden is likely to be borne by middle-income levels and the distribution of tax burden is skewed (threshold income in India is Rs 2.5 lakh and peak income is Rs 15 lakh, so the threshold to peak rate multiple is very low). 

Middle-income level in India (the upper band of middle income i.e. above Rs 15,00,000) is facing the peak-tax rate which impacts their personal disposable income and aggregate demand in the economy, added PHDCCI.

Meanwhile, the industry body mentioned that there is a need to create uniformity in the tax slabs in order to bring down the tax burden. 

The taxable income threshold should be increased from Rs 2.5 lakh to Rs5lakh and accordingly, there should not be the imposition of the peak tax rate on income upto Rs 25,00,000.