In which type of tax is the marginal tax rate higher than the average tax rate?

Taxes are often classified by how the tax rate changes as income or the tax base increases:

In a progressive tax, the rate of tax increases as income rises. People with higher incomes pay not only more tax in total but also a higher percentage of their income as tax. The marginal tax rate, that is, the rate of tax on each additional rupee earned, is higher than the average tax rate (total tax divided by total income). This is because the extra income falls in higher tax slabs.

In a proportional tax, the rate stays the same at all levels of income. The marginal rate and the average rate are equal. A flat tax is an example.

In a regressive tax, the burden falls more heavily on the poor. The percentage of income paid as tax falls as income rises. Many indirect taxes on necessities are regressive in effect, because poor people spend a larger share of their income on such goods.

Income tax in India is a good example of a progressive tax. Income is divided into slabs, and each slab is taxed at a higher rate. For example, under the new tax regime, higher slabs of income are taxed at rates going up to 30%, while income up to a certain level is not taxed at all. Progressive taxation reduces inequality, because it collects more from those who are better able to pay; this is called the "ability to pay" principle.

Direct taxes in India are collected by the Central Board of Direct Taxes (CBDT), while indirect taxes such as GST and customs come under the Central Board of Indirect Taxes and Customs (CBIC).

Why not the other options?

• ✗In a proportional tax, the marginal and average rates are equal.
• ✗In a regressive tax, the rate falls as income rises.
• ✗A flat tax charges the same rate on all income, so it is proportional.