Time we raised direct taxes - Outside View by S.S. TARAPORE

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Time we raised direct taxes
Feb 8, 2013

Fiscal adjustment and distributive justice should go together. Hence, a marginal tax rate of 40 per cent should be applied on the super rich.

It is hoped that the Budget for 2013-14 will respect the need for fiscal integrity and equitable burden sharing of the pain of fiscal adjustment.

Macroeconomic Deception

Fiscal adjustment is set out in terms of attaining a medium-term objective of reducing the gross fiscal deficit (GFD) to Gross Domestic Product (GDP) ratio over a five-year period, from 5.3 per cent in 2012-13 to 3.0 per cent in 2017-18. The nominal GDP is so large that an infinitesimal variation in this number can enable the attainment of the desired GFD-GDP ratio. The ratio of GFD to total expenditure, as per the Budget estimate for 2012-13, was 34 per cent, which is unsustainably high.

Furthermore, there can be a throw-forward of expenditure which can facilitate the attainment of the desired objective. Again, food, fertiliser and fuel subsidies can be tossed around in a manner which is less than transparent.

Thus, the quality of fiscal deficit is as important as its size. It is not as if the Indian fiscal has less integrity than in other countries. Subject to these limitations, one would wish to see an equitable burden sharing of the fiscal adjustment.

A Regressive Fisc

The Indian fisc is highly regressive in that tax receipts are approximately equally divided between direct and indirect taxes. It is one thing to enhance 'sin' taxes (liquor and tobacco) and quite another to raise indirect taxes across the mass consumption basket.

As part of distributive justice, the Government should bite the bullet and tighten direct taxes where there are glaring gaps, while easing the burden on the relatively vulnerable segments. A higher income tax slab of 40 per cent could be introduced for annual incomes above Rs 25 lakh. Responsible industry leaders in the US, Germany and France have themselves suggested higher taxes for the 'super-rich'.

Vinita Bali, Azim Premji and Kris Gopalakrishnan have endorsed the case for higher taxes for the 'super-rich'. Intemperate articulation by some captains of industry that there would be massive flight of capital is mere hot air.

The Government should refrain from an income tax surcharge as it is biased against the States, as the Centre expropriates the entire receipts under surcharges.

Inheritance and Gift Tax

The mere talk of an Inheritance Tax by C. Rangarajan and P. Chidambaram, on the ground that the next generation has not created the wealth, has generated apoplexy among the 'super rich'.

The Finance Minister could announce that, in principle, it has been decided to introduce an inheritance tax and that the specifics would be announced after a full scheme is drawn up.

A tax of 30 per cent could apply on estates in excess of Rs 10 crore and the only exception should be a self-occupied 1,500 square feet dwelling.

It is imperative that the present exemption for gifts to a long list of relatives should be scrapped and all gifts taxed at a flat rate of 10 per cent, which will enhance the time value of tax receipts, rather than a higher collection under an inheritance tax.

Dividend Tax

At present, there is a dividend distribution tax (DDT) of 15 per cent (plus surcharges). Dividends in excess of Rs 5 lakh should be subject to an income tax of 15 per cent.

The total exemption of dividends from income tax is a fiscal atrocity, which should be rectified, but the Finance Minister is unlikely to agree to this measure. Hence, the least that could be done is to raise the DDT to 20 per cent.

Standard Deduction

It is time the Government recognized that abolition of the standard deduction for employees was an error and this should be restored.

There is a case for enhancing the present Rs one lakh 80C deduction to foster savings. But it is essential to appreciate the time cycle of savings. Accordingly, there should not be an 80C deduction for senior citizens but a pro tanto increase in the general exemption limit for senior citizens to the extent of the 80C deduction.

Inflation Indexed Bonds

The Budget should announce the introduction of a five-year IIB (Inflation Indexed Bonds) with a limit of Rs 5 lakh per individual. If the cumulative inflation over five years is 40 per cent, on a face value of Rs 100, on maturity, the holder should get a redemption amount of Rs 140.

The indexation should be on the Consumer Price Index (CPI). If the real interest is fixed at 3 per cent and the CPI inflation is 10 per cent in a year, the holder should receive Rs 13 as interest on a face value of Rs 100.

Per contra, if the inflation rate is only 4 per cent, the holder would be paid an interest rate of 7 per cent. An IIB is an incentive for government to bring down the inflation rate.

The Budget of February 2013 is a make or break one for the government.

If hard options are followed, the Government would realise gains, but if it goes in for soft options, the Government will pay a high price in 2014.

Please Note: This article was first published in The Hindu Business Line on February 08, 2013.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.

Disclaimer:

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