Obsession with economic growth since 1992 has meant disregard for principles of equity in our tax system. Where do we stand with regard to the principles of vertical and horizontal equity in taxation? Look at the Billionaires club.
According to an estimate prepared by a Research Institute from Delhi, there are 615 members in the Billionaires Club. The top 5 billionaires account for 1/3 of the total net worth of the super rich members. Headhunters have projected 10 per cent salary increase for chief executives in the corporate world in India. This will be the highest rise and ahead of China. There are now 893 crorepathis among India's CEOs. Figuring top in the list are a husband and wife team from Chennai, accounting for a gross salary of Rs 37 crore. There are CEOs taking salaries above Rs 10 crore. The net worth has gone up phenomenally. The wealth of these corporate icons is always of the order of nearly Rs1 lakh crore and above each year by year; the membership of billionaire club is growing, proving the adage that the rich are getting richer.
The Central Statistical Organizations (CSO) has pegged the per capita income for India at Rs 33,283 a year. This is less than half the figure from China. The contrast between the members of the billionaire club and the
No doubt, some of the billionaires have made it the hard way to the top through honest enterprise. But many others in the club had taken advantage of a system that allows cornering of scarce resources or their political connections. Is it not time for the Government to demand that those who have made it to the club should contribute to the society in return for the super profits they made?
Personal Tax Rates
For more than a decade, in the name of stability, tax rates have been kept constant at 10 per cent, 20 per cent and 30 per cent for individuals. The highest marginal tax rate stands at 30 per cent for incomes above Rs 5 lakh. Economists in the West have started debating the question whether considerations for redistributive justice should prevail. Tax systems across the world are known to be either proportional or progressive. In the former, revenue collected rises proportionally with income. A uniform rate of tax applies to all incomes with very few exemptions. On the other hand, in the progressive system of taxation, revenue collected rises more than proportionally to income. Income tax is made progressive by having exemptions for very small incomes, no rates for the first slice of taxable income, and higher rates for the largest incomes. Is the Indian tax system progressive or proportional?
Forget the slabs at 20 per cent and 10 per cent. Incomes above Rs.5 lakhs are taxed uniformly at 30 per cent. This means that our claims to have adopted a modern forward looking progressive tax system are hallow. When it comes to corporate tax rates, corporate barons point to the rates in countries such as Singapore, Malaysia and Hong Kong.
What about personal tax rates? The following countries apply personal tax rates which are higher than our 30 per cent; Algeria - 30, Angola 60, Argentina 35 , Australia 45, Austria 50, Barbados 35, Belgium 55, Chile 40 , China 5-45, Columbia 33, Croatia 45, Cuba 10-50, Denmark 60, France 40, Germany 45, Greece 45, Iran 35, Ireland 41, Israel 45, Italy 43, Japan 50, Morocco 38, Netherlands 52, Norway 47.8, Pakistan 35, South Africa 40, Great Britain 50, USA 35 per cent (federal).
This data will show that the super rich in India have been enjoying practically a tax holiday under a disguised proportional system of taxation. Is it far to expect that the hard earning salaried class in India should be taxed at the same rate as the captains of industry earning salaries in crores of rupees and owning wealth exceeding Rs one lakh crore? Perhaps on grounds of equity, we should have a rate of 40-50 per cent for incomes above Rs 10 lakh.
Dividend tax
Look at the way dividends are taxed.
When exemption was announced for dividend taxation, there was euphoria. It took some time for the discerning public to realise that the exemption works utterly in favour of the super rich. The additional dividend tax is borne by the companies and even the petty shareholder will bear a brunt.
Inheritance Tax
Most forward looking economies are known to levy some sort of inheritance tax on the beneficiaries of the estate. This will achieve the purposes of redistributed justice in a big way. The UK, USA, Ireland, Belgium, France, Germany and Italy are some of these countries that levy inheritance tax. Why was this duty discontinued from 1985 onwards? Is it not time that we bring back the estate duty in to our fiscal system again?
(The author is a former Chief Commissioner of Income-Tax.)