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Thursday, November 28, 2013

Government should increase tax rate on the ‘super-rich’


·         The case for increasing the tax on the super-rich has to be
seen in the context of the potential fiscal crisis the country
finds itself in. At a time when the need to reduce the fiscal deficit is widely acknowledged, the issue is one of how much each section of society will contribute to this task. The official effort to improve targeting of subsidies, including food subsidies, makes it clear that even those who are only marginally above the poverty line should be asked to pay more for their food.
·         When the poorest of the middle classes are contributing tothe task of reducing the fiscal deficit, it is difficult not to ask the super-rich to do their bit. If the definition of
super-rich and the rate of surcharge are done with care
some of those paying the surcharge may not even notice
the extra burden.
·         We need to note that the relatively modest rates of
taxation of the rich over the last decade and a half
have not really led to a massive increase in tax
payers. Income tax payers account for just about 3
per cent of India’s population. If lower tax rates
have not attracted too many additional tax payers
why should we assume that higher rates would drive
the existing ones away? It may well be that those
who pay taxes today have no way of evading it, and a
surcharge on the super-rich is not going to change that.
·         The Chairman of the Prime Minister’s Economic
Advisory Council, C. Rangarajan’s recent remarks
suggesting imposition of a surcharge, if not creating a
separate higher marginal income tax slab, on the ‘superrich’ seems to have been intended to test the waters more than anything else.

·         If taxes on the super-rich are raised wouldn’t it encourage
them to simply evade them? The higher rates could then
be more than offset by the increased evasion, leading to
lower collections.

·         The proposal, in any case, makes no sense at this stage. It
only disturbs a successful model of stable and moderate
tax rates adopted in India, going back to the 1997-98
Budget of somebody, who also happens to be the Finance Minister today. It was P.Chidambaram’s ‘Dream Budget’
that lowered the personal income tax rates from 15, 30 and 40 per cent to the current slabs of 10, 20 and 30 per cent. Moreover, it slashed the corporate tax rate for domestic companies from 40 to 35 per . The direction was clearly towards a regime of moderate and stable rates.That approach has paid rich dividends. From a level of Rs 31,500 crore in 1996-97, the Centre’s direct taxes revenues have almost touched Rs 5 lakh crore in 2011-12.
A 17 times jump in 15 years, with corporate tax
collections growing 20 times (from Rs 16,250 crore to Rs 3,27,000 crore) and personal income tax by over 11 times
(from Rs 15,000 crore to Rs 1,72,000 crore)!

·         A new tax for the ‘super-rich’ is unlikely to garner
anything substantial in terms of revenues. But it will
unnecessarily restore an element of unpredictability and
arbitrariness that was the hallmark of the old preliberalisation


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