The Richie Itch


Finance Minister Chidambaram has always been delight for business journalists. Come the annual budget and he ensures a host of headlines in the run up through strategic sound bites fuelling speculation of what announcements can be expected at the end of February. This time he has initiated a fresh debate on a stale subject – that of (additionally) taxing the rich to pay for the poor (government kitty) – something which has not seen the light of day since 1997 when three tax rates that of 10%, 20% and 30% were enforced and have remained. The tinkering, if any, has taken place through shifts in the income slabs on which the levy is to be calculated. Of course there has been the often surreptitious imposition of cesses and surcharge. This time though faced with the uphill task of controlling the fiscal deficit through raising revenues without non populist moves given the upcoming union elections – the chances of him biting the bullet, albeit as a one time move, may be more likely than ever before. Should it happen, would it be justified?

The Finance Ministry data corroborates that 3.24 crore of the country’s citizens pay tax. Nine out of every ten taxpayers earn less than Rs 5 lakhs per year and contribute to just 10% of the total tax collections. Whereas over 60% come from the 4 lakh people who earn more 20 lakh annually. This certainly makes a case for the election sensitive government to enhance its revenues by introducing a higher tax rate on a higher income slab comprising of very few rich voters. The slab being suggested is Rs 1 crore per annum. Earlier this month, C Rangarajan, chairman to the PM’s economic advisory council also pitched for higher taxes on the super rich. The argument has found strength with the US Congress recently voting for raising taxes on the rich. The legislation there proposes to hike tax rates on individual earning above 400000 dollars ( Rs 2.2 crore) per year and on a couple earning over 450000 dollars (Rs 2.5 crore). The argument to tax the super rich is often put forth by the middle class particularly those who are salaried with fixed income. Contributing to the bulk of the exchequer they feel denied the opportunity available to the self employed to access creative methods to reduce or avoid if not evade paying taxes. The angst is majorly felt towards rich agriculturists with tax free income, promoters who manipulate income sources to pay lower taxes, bureaucrats who enjoy a lavish lifestyle on the back of perquisites which do not attract taxes. Not to forget the corrupt politicians and savvy industrialists who amass their wealth through unaccounted income channelized through land deals, overseas transfers through the hawala route or simply accumulating gold. The recent vigilance on high payouts by promoters and directors in limited companies by SEBI is a much needed step in the right direction.

Having said that, the argument that the rich should be taxed to reduce disparities of income is shallow. For one it hardly does. Tax being a percentage levy the income differential will largely remain. Those who earn more pre tax will continue to earn more post tax. Just the quantum will be slightly less. Then the higher taxes would simply result in more money available with the government whose authentic and appropriate usage is under question. Furthermore the move could well disincentive financial profits, a necessity for fuelling the spirit of entrepreneurship. Besides it is the rich who can afford influential consultants to exploit loopholes in the law and thereby save taxes. Then these rich people legally save most of their taxes through capital gains and dividend which are taxed at lower rates .Hiking income tax will not yield much and may divert more. Finally the move if intended simply to raise revenues and curb the fiscal deficit would be ineffective as inflows would be limited. Better options like disinvestment, introduction of GST, expanding the purview of service tax and enforcing the direct tax code should be given priority. Easing the process of filing taxes would always help. As would speedy and fair settlements of disputes. Most importantly, the problems of tax collections lie in indirect taxes ( like sales tax, excise etc). The ratio of direct taxes (income and corporate) to GDP has been rising. Lowering taxes which has expanded the tax payers database is the way forward.

On a different note, I personally feel the word “tax” reflects an imposition and is therefore negative. If simply termed as “contribution” it could encourage better participation however slight. For instance, the contribution by the rich towards charity, as a tax saving mechanism or otherwise is not small. Apart from immediately seeing the benefits this payout comes with accountability and control. Besides it provides a sense of pride, benevolence and retribution. None of this is got from paying taxes which one feels goes to pay corrupt officials and lazy bureaucrats. Also, imposition of higher tax on the super rich is likely to build a case for a parallel economy, with a resultant rise in the float of unaccounted (black) money as had been the case during Indira Gandhi’s emergency. Finally, there needs to be a difference in the source of wealth. If earned by contributing productively to the economy (and thereby creating other avenues of duty and tax collections ) an additional tax burden would be counter productive. However when earned through unproductive assets like real estate and gold or through speculation it is certainly justifiable. Revisiting wealth tax is a worthy option. As is another round of VDS – voluntary disclosure scheme.

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