Should Rich Be Taxed Higher

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.

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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)