IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation
The government replaces a ₹1,000 flat per-person levy with a tax of 10% of income. Rahul earns ₹5,00,000 and Meera earns ₹20,00,000. Which statement is correct about the change?
The flat ₹1,000 levy is regressive because it is 0.2% of ₹5,00,000 but only 0.05% of ₹20,00,000, so the rate falls with income. The 10% income tax takes the same proportion from everyone, so it is proportional.
- AThe old levy was progressive and the new tax is regressive
- BBoth are regressive
- CThe old levy was regressive, and the new tax is proportionalCorrect
- DThe old levy was proportional and the new tax is progressive
- Both are proportional
Explanation
The flat levy is 0.2% of Rahul's income and 0.05% of Meera's, so the average rate falls as income rises, which is regressive. A 10% tax takes the same proportion from both, so it is proportional.
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