It’s an idea whose time is certainly not now.
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 ‘super-rich’ seems to have been intended to test the waters more than anything else.
But 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 cent and abolished the surcharge. Subsequently, the corporate tax rate was reduced further to 30 per cent.
Although the surcharge did make a comeback, alongside the levy of assorted education cesses on all major taxes, 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 pre-liberalisation era.
Moreover, many of our super-rich, especially company promoters, earn copious 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 (in this case, at the highest marginal slab) on those receiving it.
But is this risk worth taking in today’s environment, where the rupee’s value is entirely dependent on foreign institutional inflows into our markets? We could reserve such ‘socialist’ concerns, howsoever legitimate, for a later day.
Rather than hike direct tax rates, policymakers would do well to focus attention on indirect taxes.
Key to that is implementing a nationwide Goods and Services Tax.
This is a reform India needs today and can be a real game-changer in terms of delivering both higher growth and increased revenues — again, from the same formula of predictable and moderate tax rates with no, or very few, exemptions.
Simultaneously, we need better enforcement and strengthening of the tax information network to make even the existing rates deliver more revenues.
The fact that only 1.4 million taxpayers currently declare an income of over Rs 10 lakh, where the maximum marginal rate of 30 per cent kicks in, shows how much more can be collected without any rate tinkering!