When India Saw a 97.5% Income Tax Rate: A Historical Perspective

When India Saw a 97.5% Income Tax Rate: A Historical Perspective
During India’s political landscape, marked by electoral promises and economic policies, a pivotal era emerged when income tax rates surged to unprecedented heights, reflecting the country’s economic trajectory.
The economic landscape of India underwent a transformation post the 1991 LPG (Liberalization, Privatization, and Globalization) reforms, contrasting sharply with the socialist inclinations prevalent until the 1980s.
In 1970, under the leadership of Prime Minister Indira Gandhi, the government raised the direct tax rate to a staggering 93.5%, eventually escalating to 97.5% by 1973-74. This move mirrored global trends antagonistic toward wealth creation.
Indira Gandhi viewed taxation as a tool for fostering income and wealth equality, implementing a policy that heavily taxed a select group, rather than broadening the tax base. However, widespread tax evasion led to the policy’s swift withdrawal.
India transitioned to a progressive tax regime post-1949, witnessing exorbitant personal income tax rates during the 1950s-80s. While the maximum tax rate was 25% in the 1950s, it soared to 88% in the 1960s.
The Budget of 1970-71, characterized by a focus on social welfare, saw Indira Gandhi proposing a steep income tax rate structure, ranging from 10% to a staggering 85% for incomes above Rs 2,00,000, with an additional 10% surcharge pushing the rate to 93.5%.
Subsequent years witnessed further tax rate hikes, with the surcharge peaking at 15% in the 1973-74 Budget, elevating the highest tax rate to an unprecedented 97.5%. This astronomical taxation fueled widespread tax evasion.
Amidst the economic strains post the 1971 war with Pakistan, former Finance Minister YB Chavan emphasized the need for fiscal measures to curb high remunerations incompatible with societal norms, culminating in the 97.5% tax rate.
Recognizing the detrimental impact of exorbitant tax rates on tax evasion, subsequent years witnessed gradual rate reductions, with the marginal rate dropping to 66% by 1976-77 and further simplifications in the tax structure.
The culmination of these reforms came in 1991, with the introduction of simplified tax brackets and rates, paving the way for India’s modern tax regime.
Amidst contemporary discussions surrounding tax policies, reminiscent of socialist ideologies, the focus lies on broadening the tax base rather than burdening a small fraction of taxpayers. This echoes the lessons learned from the era of Indira Gandhi, underscoring the need for balanced tax policies to ensure economic stability and growth.

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