How rebate u/s 87A has diluted the principle of Income Tax?

P.Jagadeeswaran | Last updated: 29 April 2020

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This article examines how Section 87A of the Indian Income Tax Act, which provides a rebate for individuals with income up to Rs. 5 lakhs, may undermine the core principle of 'ability to pay'. The author highlights anomalies where earning just slightly over Rs. 5 lakhs can result in a significantly higher tax liability, sometimes exceeding 100% of the marginal income. This creates unintended consequences and challenges the fairness of the tax system for those on the cusp of income thresholds.

Introduction: In India all the revenue augmenting acts and rules are based on the preamble principle(s) of Benefit Vs Ability-to-Pay and Canon of (i) Ability, (ii) Certainty, (iii) Convenience, (iv) Economy, (v) Elasticity and (vi) Productivity and its exigency at the time of introduction or at t

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FAQ :

The article primarily discusses the 'ability to pay' principle, which suggests that individuals should contribute to taxes based on their capacity to do so.

Section 87A allows a resident individual with a total taxable income up to Rs. 5 lakhs to claim a rebate on their income tax liability, up to a maximum of Rs. 12,500.

The article highlights that earning just over Rs. 5 lakhs, for example Rs. 5,00,001, can lead to a tax liability of Rs. 13,000, meaning the tax on the marginal income of Rs. 1 is over 100%.

It dilutes the principle by creating a situation where individuals just crossing the Rs. 5 lakh income threshold face a disproportionately high tax burden on their marginal earnings, contradicting the idea of paying according to one's ability.

The author suggests prudently allowing the maximum Rs. 12,500 rebate under Section 87A for incomes up to Rs. 5,16,500 to ensure the tax rate on marginal income does not exceed 100%.

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About the Author

P.Jagadeeswaran

GST & VAT Practitioner/ Project Finance & Management Consultant

The author is a Practitioner under GST act and under earlier VAT acts of multiple states in the country. One of the authors for the book published in the name of Simplifying Multi State VAT on Works Contracts in 2015-16 2016-17, authored by 23 leading eminent CAs Advocates in the country. Readers may reach me at P.Ja ... Read more

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How rebate u/s 87A has diluted the principle of Income Tax?