 "India’s policies on taxing capital and labour income are likely to play a crucial role in tackling inequality, according to the Economic Survey, presented on Monday.")
India’s policies on taxing capital and labour income are likely to play a crucial role in tackling inequality, according to the Economic Survey, presented on Monday.
This is given the growing need for artificial intelligence, which could have an impact on employment and income, it said.
According to economists and experts, despite experimenting, over the decades, with steep levels of progressive personal tax rates as well as wealth tax and estate duty, the tax-gross domestic product (GDP) ratio has remained in single digits.
“Inequality has been increasing and the long-term path is to create more jobs, while in the interim period we need to tax both income and equity at a higher rate. This implies that there could be higher tax rates at upper slabs or a surcharge on the rich. Also capital gains tax on equity can come under the radar screen,” said Madan Sabnavis, chief economist, Bank of Baroda.
Citing the 2022 “State of Inequality in India” report, the Survey said it observed that “in India, the top 1 per cent accounts for 6-7 per cent of the total incomes earned, while the top 10 per cent accounts for one-third of total incomes earned”.
Globally widening inequality is emerging as a crucial economic challenge, it added.
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The Survey said the government was focusing on this issue and critical policy interventions were being undertaken to create jobs, integrating the informal sector with the formal, and expanding the female labour force was aimed at reducing inequality.
Responding to the Business Standard query on the matter, Chief Economic Advisor V Anantha Nageswaran said: “We have progressive rates in both direct and indirect taxes. Ultimately, it also has implications on how we tax income, which is income from labour and how we tax income from capital, etc.”
A recent research paper has suggested India needs to impose a 2 per cent tax on net wealth exceeding Rs 10 crore and a 33 per cent inheritance tax to deal with rising inequality. Economist Thomas Piketty is the co-author of this paper.
Sudhir Kapadia, senior advisor, EY, said: “There is no point resurrecting a failed tax system. Instead, the current trajectory of a digitally enabled and transparent tax system with moderately progressive rates has ensured ever-increasing absolute tax revenues. With sustained and stable growth in the economy, tax buoyancy and the tax-GDP ratio will increase, ensuring a more equitable tax burden on all income levels. It will be better to focus on qualitative aspects of tax administration, including excellence in services and reduction in unwarranted tax notices and litigation.”
Further, the Survey said robust revenue would help the government in achieving fiscal consolidation. “Significant fiscal consolidation post-pandemic could be achieved largely due to buoyant revenues,” it said.
However, to enhance tax buoyancy, it suggested rationalising tax rates, particularly the goods and services tax (GST) rates, eliminating rate inversions, introducing broad-band rates for similar products, and expanding the tax base.
Also tax demands should differentiate between serious and less serious offences, and there should be more awareness among taxpayers regarding common mistakes, encouraging voluntary compliance and expediting dispute resolution.
It said in order to sustain the foreign investor interest in the India story, issues over transfer pricing, taxes, and import duties needed to be resolved.
Despite amnesty schemes to end tax disputes, India has been facing tax litigation in transfer pricing, royalty payments, and capital gains. An internal estimate suggests about Rs 20 trillion is tied up in these disputes.
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