Are higher taxes on super rich justified?

Fri, 25 Jan Pre-Open

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First came Britain and France, then Australia and the United States. Now it is India's turn. The debate for having a 'super-rich' tax in India is getting intense ever since the chairman of the Prime Minister's Economic Advisory Council (PMEAC), C Rangarajan, mooted a proposal in this regard. According to Rangarajan, the time has come when the government should either look at imposing surcharge on income above a threshold or a higher tax slab to augment the government revenue and bridge the fiscal deficit.

However, India Inc has came out strongly against the proposed move to tax the super-rich, saying the move would discourage entrepreneurship and lead to professionals relocating to low tax domiciles such as Singapore, Dubai or London.

India's tax revenue base has remained stagnant over the years. The country's tax to GDP ratio, an important indicator to measure tax administration, has remained abysmal. As per reports, the ratio has nudged downwards from a high of 11.9% of GDP in 2007-08 to 10.1% of GDP in 2011-12. This is a poor indicator reflecting inefficiencies prevailing in the system considering the overall growth rates have improved barring the last two fiscal.

The tragedy of the Indian tax system is that the honest tax payer is savagely attacked again and again. The dishonest tax payer seldom pays his tax dues. The areas of tax evasion and generation of black money are well known. Have we made any attempt to check tax evasion in sectors like liquor, real estate, cinema and private professional colleges? These categories continue to indulge in large-scale tax evasion without any action by the IT Department. By taxing the super-rich, we will only place a further premium on dishonesty and punish the honest tax payer.

If the object is to earn greater revenue, then taxing the super-rich will be counterproductive. The marginal gain in revenue will be temporary and there will be greater loss of revenue through lower collection of indirect taxes. It will be better if the Central Government re-examines the myriad wasteful welfare schemes. A 5% reduction in these will not only eliminate the need to tax the super-rich, it may even result in reducing rates of our indirect taxes.