Individual taxation: A proposal for reform

Abstract

Inflation affects real income tax liabilities in two ways. First, inflation erodes the value of fixed rupee amounts ( for example, ceiling on doductions, nil tax income slab, etc.) and second, in a progressive tax system, inflation moves a tax payer in a high tax bracket (bracket creep). In the absence of statutory tax reduction, this would result in a tax liability proportonately greater than inflation- induced increase in gross income, and thus, decrease the after tax real disposable income available to the tax payer. To illustrate, how inflation increase tax burbon and erodes disposable income, consider an individual with a gross salary of Rs. 30,000 in the financial year 1982-83 ( assessment year 1983- 84). With a price increase of eight per cent in the financial year 1983-84 and a further 10.3 per cent increase in the financial year 1984- 85, and assuming that this gross salary increase at a rate that matches inflation rate, his gross salary in financial year 1984- 85 (AY 1985-86) would be Rs. 35,700.