Events & Issues
New Delhi, 28 January 2013
Budget Projection
SHOULD RICH BE TAXED
HIGHER?
By Dhurjati Mukherjee
Has Finance Minister P
Chidambaram set the cat among pigeons? Many ‘super rich’ may think in the
affirmative with his recent statement overseas. After assuring foreign
investors that the tax rates would remain stable, in an interview to a TV
channel in Singapore
he stated: "there is an argument that when the Government requires more
resources, the very rich should willingly pay a little more." In the same
breath, Chidambaram, however, added that it was “simply an argument” that he
had heard and was merely repeating it!
Apparently, one doesn’t
have to look far from where this “argument” is emanating. There is an ongoing
debate that there is an imperative need to increase the country’s tax to GDP
ratio and reduce the fiscal deficit in the coming Budget. And, keeping this in
view, chairman of the Prime Minister’s Economic Advisory Council, Dr. C
Rangarajan, recently proposed that the super rich should be made to pay higher
taxes. He has suggested imposing a surcharge, if not creating a separate higher
income tax slab, on the super rich.
There has been some
controversy regarding the proposal as certain sections believe that in case of
such a tax, the additional revenue generated would not be enough while this may
also encourage the rich to further evade taxes. However, it is generally agreed
that taxing someone who is earning at a much higher rate is quite justifiable
in terms of equity and in accordance with the principles of progressive
taxation. A person earning say Rs 25 lakhs and the other Rs 60 lakhs cannot be
put in the same taxation bracket. It may also be mentioned that taxing the
super rich will definitely send a positive signal about the intentions of the Government
and increase revenue collection to some extent, if not the desired levels.
There have been
suggestions that the Government can go further and introduce an inheritance tax
which would shrink inherited wealth and may become an obstacle for corporate
houses to work hard and expand their business. Some have argued that they may
became lazy and do nothing much to improve the family business though these
projections are unfounded.
To control the fiscal
deficit and bring it down to 5.3 per cent, the emphasis has so far been on
expenditure control. It is expected that in the forthcoming Budget – which
happens to be the last one before the Parliamentary elections -- instead of
cutting subsidies the Finance Minister has been rightly advised to tax the rich
and the super rich. Another one or two slabs -- say from Rs 50-60 lakhs to Rs
one crore and another above Rs one crore -- may be imposed.
Delving into the past,
the present Finance Minister, who will be presenting his first Budget in his
third stint, has stated that he believed in stable tax rates and that those announced
in 1997 have remained and have survived four governments and four finance
ministers. At the same time, it is noted that he had lowered personal income
tax rates from 15, 30 and 40 per cent to the current slabs of 10, 20 and 30 per
cent respectively. Moreover, the Ministry slashed the corporate tax rate for
domestic companies from 40 to 35 per cent and abolished the surcharge.
Subsequently, the corporate tax was reduced further to 30 per cent. The last
reduction was obviously not justified and a major section of society, including
political leaders and analysts, protested against this.
According to reports,
there are only around 1.8 million Indian households which have an annual income
of Rs 45 lakhs a year but around 470 million Indians had incomes between Rs 5
and Rs 20 lakhs annually. Rich farmers, whose agricultural incomes are not
taxed, form the biggest sub group here. There is need to seriously consider
whether this group needs to pay some taxes.
There are also doctors who
earn lakhs through practice/surgery etc. But do not even reveal 50 per cent of
their actual income. Also professionals, including teachers and consultants,
only reveal their salary while the other income is not shown.
Many of the rich, especially
company promoters earn high sums as dividend incomes that are tax exempt at
their hands. The dividend tax, levied at a basic rate of 15 per cent is only on
the companies distributing them. One possibility is to consider dividends as
part of ordinary income and tax it accordingly at the highest slab on those
receiving it.
One may mention here that
the current fad globally seems to be soaking the rich to get over deficits. In France, given serious consideration for increase
in the coming Budgetce, Francis Hollande wants to tax the rich at 70 per cent
rates and in the US,
Barack Obama succeeded in his attempt to tax the rich at higher rate. There are
several reasons for this, one of which is that India’s tax to GDP ratio is under
17 per cent. In Norway, it
is 41 per cent, whereas Germany’s
is around 37 per cent, the UK
is at 34 per cent and the US
at 24 per cent while that of China
is 17.5 per cent.
But none of these
developed countries (except China)
have over 30-35 per cent of the people below the poverty line. A little
adjustment that is, a little increase of the taxes of the rich and the super
rich – say those whose incomes are above Rs 50/Rs 60 lakhs – may take the
country’s effective tax rate to around 24-25 per cent or even higher.
Thus, while the taxes of
the big fish may be considered for increase in the coming Budget, the tax base
has to be broadened. One of the fallouts of the pervasive black money in
circulation is that the RBI’s monetary policy of stemming liquidity in the
economy has not had much impact and inflation continues to rise unabated.
As generation of revenue
has become necessary at this juncture, raising the taxation structure – both
direct and indirect taxes – need to be seriously considered by the Finance
Minister. Simultaneously, better and stricter enforcement and strengthening the
tax information network is the need of the hour to make higher rates deliver
significantly more revenue that we very much need for subsidies and various
schemes for the poor and the economically weaker sections of society. Will
Finance Minister, who unfortunately has been labelled pro rich, bite the
bullet? --INFA
(Copyright, India News and Feature Alliance)
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