Finance Minister P Chidambaram has said that the idea of the rich tax is worth considering, but it has not gone down well with economists associated with think tanks. Even as some of them find the intention behind the idea, mooted by Prime Minister's economic advisory council chairman C Rangarajan, sincere, they have their doubts on practical aspects of any such move.
Ajay Shah, a professor at the National Institute of Public Finance and Policy (NIPFP), said,“When taxes are 30 per cent of the income, people can still do their business honestly, but when it goes up further, it will fuel a black market and leads to tax evasion and similar dishonest behaviour.”
In the 1971–72 budget, the then finance minister Y. B. Chavan, had raised the top marginal tax rate to 97.75 percent, which many believed led to widespread tax evasion.
Rajesh Chadha, a senior fellow at NCAER said that a tax increase on the rich would only be an extra burden on the people who are already taxed.
“Tax compliance in India is very low. We can think of a tax increase when the tax compliance in India is as high as that of the United States," he said.
Surcharge used to be imposed at the rate of 10 per cent on an annual income of Rs 10 lakh a year in India. But it was done away with in Budget 2009-10. The previous year, surcharge had brought Rs 10,034 crore to the government kitty, constituting 8.18 per cent of income tax collection that year. There were 1.37 million people earning Rs 10 lakh to Rs 20 lakh a year, constituting 4.3 per cent of the total number of assessees.
In that year, there were 0.4 million taxpayers who earned over Rs 20 lakh a year, accounting for 1.3 per cent of the total number of assessees. They paid Rs 93,229 crore, contributing 63 per cent to the total income tax mop-up.
The issue of the rich tax assumes importance as the Centre is trying hard to rein in its fiscal deficit in line with a five-year roadmap starting from the current financial year. This roadmap stipulates that the Centre's fiscal deficit would be 5.3 per cent in 2012-13 and thereafter be reduced by 0.6 percentage point every year to bring it down to 4.8 per cent in 2013-14 and three per cent by 2016-17, the concluding year of the 12th five year plan.
The budget had estimated the deficit to come down to 5.1 per cent, but the finance minsitry revised it mid-way to 5.3 per cent as subsidies were pegged at 1.9 per cent of GDP, which are now expected to be around 2.4 per cent.
Meanwhile, the deficit figures improved a tad in December, 2012. For the first eight months of the current financial year, the centre's fiscal deficit stood at 80.4 per cent of the budget estimates, but in the first nine months it came down a bit to 78.8 per cent.
Economists believed that the rich tax might bring some relief to the government in its efforts to check fiscal deficit temporarily, but it is not a permanent solution.
"It might be true that the revenues will temporarily rise when there is a tax increase, but this is by no means a sustainable solution to cure the fiscal deficit.”, Chadha said.
Jayshree Sengupta of Observer Research Foundation agreed that the rich has an obligation to give back to the society, but she said the problem with high taxes on the rich is that the tax compliance goes down when the tax rates are higher.
"The government has to see what the optimum amount of taxation is. When the taxes were high in the 1970s, it resulted in too much corruption," she said.
She said while the increased money due to the proposed rich tax will go to the coffers, the government has to deliver as well.
"Instead of going to the government, the money should go into scheme, that help the poor, like insurance," Sengupta said.
In a pre-budget meeting with the Finance Minister and his team, Pulin Nayak of Delhi School of Economics had suggested that the government can stay
with the basic tax slabs of 10, 20 and 30 per cent. "However, we need much better enforcement and need to widen the tax net."
Even if the rich tax is introduced, what would be a threshold? If the methodology used by the United States is extrapolated, even those earning Rs 12.77 lakh a year may have to shell out extra to fill government coffers.
As part of the fiscal cliff deal, the US recently increased tax rates for individuals with incomes above $400,000 a year and couples with those above $450,000 a year. In the US context, $400,000 or $450,000 means roughly 3.5 times its per-household gross domestic product.
So far as India is concerned, the size of economy stood at Rs 89.80 lakh crore in 2011-12, when there were 246 million households in the country. This means India’s per-capital annual household income in the year was Rs 3.65 lakh. Taking 3.5 times as the standard to determine the category of individuals to be taxed at a higher rate, the figure would translate into Rs 12.77 lakh a year.
In 2011-12, per capita income of India stood at Rs 61,564 a year. Since it is an average and assuming that almost one-third of India lives below poverty, many of us in India may not be earning that much even. So, in India's context Rs 12.77 lakh could certainly be considered a higher income, though whether it should be clubbed as rich or not is anybody's guess.
And still we are to hear from the government, whether the tax would be on the super rich or rich.
