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Corporate Jan 10, 2013

Don’t tax the tax-paying rich even more; find more bakras

By Blog

By R Jagannathan

The answer to the question, "should the rich pay more taxes?" will always be yes. But the answer to a more pointed question, "Do you consider yourself rich?" will elicit very few yeses. Barring a few businessmen, few will answer yes. We all like to think of ourselves as belonging to the middle class, whether we earn Rs 50,000 a month or Rs 5 lakh.

This is why when government ministers start muttering about taxing the rich, we all agree, but when Pronab Sen, former chief statistician of the government, says that those earning more than Rs 12.77 lakh per annum should consider themselves rich and hence worthy of higher taxation, there are howls of protest among Firstpost readers.

Sen's calculation, as noted by Firstpost, takes its cue from the recent US yardstick of raising taxes on those earning above $400,000 - which is 3.5 times the average household income in the US. Calculating the rich on this basis gives Sen an Indian threshold of Rs 12.77 lakh of annual taxable income.

Few Indians earning an average of Rs 1 lakh a month think of themselves as rich. And the number of people who find themselves in this category may be just about a million. And they are already contributing the bulk of the country's income taxes anyway. Taxing them will only sour the negative mood further.

The only way to tax the rich or the super-rich is to bring those who yet don't pay taxes into the net. In short, find a way to earn taxes from those who are currently able to evade it.

According to figures put out by the taxman, in 2011-12, some 400,000 taxpayers with incomes above Rs 20 lakh per annum contributed 63 percent of income taxes collected.

These 400,000 Indians would include all the Tatas, Birlas, Ambanis and Jhunjhunwalas, not to speak of some high salary earners, including top government bureaucrats and middle level executives in the corporate sector. Taxing them even more would only skew the picture further - the so-called "rich" will then be contributing over 70-75 percent of total income taxes - and it will be counter-productive.

Reason: the only sustainable tax system is one where taxes are collected from a wider base. It should not be more from fewer people, but less from more people. Consider the negatives in taxing these same 400,000 more: they are all people with resources, with international options. They will either migrate, or plan their income disclosures in such a way as to bring down their effective tax rates.

The only way to tax the rich or the super-rich is to bring those who yet don't pay taxes into the net. In short, find a way to earn taxes from those who are currently able to evade it.

Among Indians who may be evading or avoiding taxes, professionals (like doctors, lawyers, and other non-salary earners) have the maximum scope to keep their earnings untaxed since they are not easy to police. The other group that evades taxes is the plain-and-simple businessman or rich individual whose earnings are in cash (realtors, for example), or those who have simply salted money away abroad - in tax havens or in places that are out of reach of the Indian taxman.

One place to start is match databases. A Business Standard editorial today quotes research firm TNS as saying that three million people have an investible surplus of over Rs 50 lakh when the number of taxpayers earning over Rs 10 lakh is just about half that number. "Household surveys by the National Council for Applied Economic Research say that 3.8 million families were earning over Rs 10 lakh in 2009-10. If that's broadly accurate, more than half of India's rich are evading taxes," says the editorial.

Clearly, half of India's so-called rich may not be in the tax net, or are reporting far less income that they should be. Most of these people may be from the professional classes. Putting various databases of people holding assets and people paying taxes should yield clues on whom to tax.

But even this is not going to bring in the big moolah. The real tax jump can come only from getting the super-rich to contribute more and they can't really be forced to do this.

The rich can suborn the system, and this is why they get away. But they can be lured to pay tax. The time may be ripe for a gigantic black money amnesty scheme.

There is a huge amount of black money with Indians, both in rupees here and dollars abroad. While it is not possible to estimate the actual amounts, there is no denying the scale.

Last year, a committee headed by MC Joshi, a former Chairman of the Central Board of Direct Taxes, suggested that money stashed abroad should be brought back by a tax-and-forgive policy. It said: "The Central government may consider bringing a compliance scheme with reduced penalties, and immunity from prosecution, especially to bring back money kept abroad."

A scheme to allow the rich to bring back amounts held abroad without question if they pay the top tax rates (30 percent) should work quite well. Alternatively, we could float 10- or 15-year zero-interest domestic rupee bonds to finance infrastructure, but which can be freely transferable like a share. Currently, thousands of crores of real estate money is floating around in the black market since there is no other way to use so much cash. A zero-coupon freely transferable bond would give cash holders an exit option. Right now, infrastructure companies are issuing tax-free bonds paying 7.5-8 percent interest.

There are several ways of taxing the rich and the super-rich. Taxing those who are already taxed quite well is not the answer to the problem of raising more budgetary resources.

by Blog

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