Opinion Tax theatrics

The changes proposed in this futile exercise are also of little merit. Not only have some sensible suggestions of the parliamentary standing committee been ignored, but other changes — such as the introduction of a “super-rich” tax bracket of 35 per cent for individuals earning above Rs 10 crore and an additional tax of 10 per cent on dividends above Rs 1 crore — seem aimed at pre-election signalling rather than reforming the system to maximise tax collection and compliance.

The fact of the matter is that the soak-the-rich school of taxation doesn’t work. If it did, the days of 90 per cent-plus personal income tax rates wouldn’t have generated the kind evasion they did. As a result of a moderation in tax rates, the proportion of black money in the economy came down from 30 per cent of the GDP during the 1970s to 17 per cent now. And while proponents of enhancing the top-bracket tax rate cite convenient figures comparing India’s tax to GDP ratio with those of Scandinavian and western European countries, the fact remains that India’s effective (adjusting for the number of people below the poverty line) tax to GDP ratio, at 28.3 per cent, is greater than that of the US, and other countries in its peer group such as China, Mexico and Malaysia.

Rather than focusing on the imagined dereliction of the “rich”, it would be better to try and encourage better compliance among the middle classes. Those earning between Rs 10 and 20 lakh on average paid Rs 1.3 lakh, or 8.6 per cent of average income, as income tax in 2011-12. In contrast, assuming that the average income in the Rs 20 lakh-plus bracket is Rs 1 crore, the tax incidence was 23 per cent. Some estimate that only 20 per cent of people who actually earn between Rs 10 and 20 lakh actually pay any tax at all, compared with 45 per cent in the Rs 20 lakh-plus bracket.

Better compliance, particularly among the middle classes, is clearly the need of the hour. And this is exactly what the parliamentary committee sought to encourage when it suggested that the personal income tax exemption limit be raised from Rs 2 to 3 lakh. Similarly, it suggested the widening of slabs so that the 20 and 30 per cent rate would only kick in if one earned between Rs 10 and 20 lakh, and above Rs 20 lakh, respectively. Unfortunately, the finance ministry rejected these suggestions and chose to strike poses instead.