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MOSL: ECOSCOPE-What could changes in personal tax rates entail?; Identifying gainers and losers under various scenarios

ECOSCOPE: What could changes in personal tax rates entail?; Identifying gainers and losers under various scenarios

After the Indian government’s decision to cut corporate tax, expectations run high for similar reforms in personal income taxes. While it remains to be seen if (and in what form) the government accepts the recommendations of the Committee on Direct Tax Code (DTC), we present our analysis on the potential impact on the fiscal math and the tax payers under various scenarios. In particular, we answer five relevant questions in this note.

1. Who all pay personal income tax and how much?
Individuals & Hindu Undivided Family (HUFs) account for ~80% of total taxes collected by the government on income other than corporate profits. Non-corporate sector including firms, association of persons (AOPs) and body of individuals (BOIs) account for another 13-14%.

2. Where do personal income tax payers derive their income from?
Around 57% of personal income tax payers derive their income from salaries and ~27% from business income. The share of salary income has increased over the past few years, while it has declined for business income.

3. What could be the potential impact if DTC recommendations are accepted?
Since the DTC report is not available in public domain, news articles suggest three different set of recommendations on tax payers with income below INR0.5m – (i) no tax (DTC1), (ii) 10% tax rate (DTC2) and (iii) 5% tax rate (DTC3). Since the government incurs a cost of INR1.15t on various exemptions provided to personal income tax payers, the fiscal cost in an exemption-free new tax regime could be between INR 0.7t and INR1.1t under DTC1 depending on whether surcharges are retained. Under DTC2, the tax burden rises sharply for the lowest income groups. However, DTC3 could be tax-neutral if surcharges are retained.