Representative image indicating a surcharge.
Credit: iStock Photo
With the Union Budget 2024 to be presented on February 1, here is a look at how surcharge works.
A surcharge is an additional charge or tax levied on the amount of income tax or other taxes. It is essentially a tax on tax, calculated as a percentage of the existing tax liability. The surcharge is used as a tool by the government to generate additional revenue, especially from higher-income groups or specific sectors.
Here are some key points about surcharge in the Indian tax system:
Applicability on Income Tax: A surcharge is most commonly applied to income tax for individuals, Hindu Undivided Families (HUFs), firms, companies, etc., who have higher income levels. The rate of surcharge varies based on the income slab or the nature of the taxpayer.
Progressive Taxation Tool: The use of surcharge is in line with the principles of progressive taxation, where higher-income earners pay a higher rate of tax. This is aimed at ensuring social equity and reducing income disparity.
Corporate Tax Surcharge: Companies, especially with large income brackets, may also be subjected to a surcharge on their corporate tax liability. The rate of surcharge for companies can differ based on their level of income and type (domestic or foreign).
Rate of Surcharge: The rate of surcharge is not fixed and can be changed during the annual budget announcements. It is determined based on the fiscal needs of the government and economic conditions.
Impact on Total Tax Liability: The imposition of a surcharge increases the total tax liability of individuals and entities falling under the higher income brackets. For example, if an individual has a tax liability of Rs 10 lakhs and the applicable surcharge rate is 10 per cent, the surcharge amount will be Rs 1 lakh, making the total tax liability Rs 11 lakhs.
Revenue for Government: The revenue generated from the surcharge is used by the government to fund various social welfare schemes, infrastructure development, and other governmental activities.
Cess vs Surcharge: It's important to distinguish between a cess and a surcharge. While both are additional levies over the basic tax liability, a cess is usually levied for a specific purpose (like education, health, etc.), and the funds collected are supposed to be spent only for that purpose. In contrast, the revenue from a surcharge goes into the government's general pool of funds.
The surcharge is an important component of the tax structure in India, allowing the government to mobilize additional resources, especially from the higher income segments, and maintain fiscal balance.
(Disclaimer: This copy has been written by a generative AI tool and has been reviewed and edited by the DH Web Desk)