Unaware of DTC, GST, Retail FDI, Disinvestment Impact,Majority of Employees surveyed expect Finance Minister Pranab Mukherjee to increase the income tax exemption limit to Rs 3 lakh in the upcoming Budget.
Troubled Galaxy Destroyed Dreams, chapter 753
Palash Biswas
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Unaware of DTC, GST, Retail FDI, Disinvestment Impact,Majority of Employees surveyed expect Finance Minister Pranab Mukherjee to increase the income tax exemption limit to Rs 3 lakh in the upcoming Budget.While the Congress party's drubbing in the recent assembly polls, talk of mid-term elections, key alliance partners pulling in different directions on federalism and price rise...the going for India's ruling United Progressive Alliance (UPA) appears tough as parliament meets from Monday for considering and passing the budget for fiscal 2012-13.
The common man was put on the pedestal for the first time in 2009 with emphasis on inclusive growth. His main interest is really on the expenditure side of the budget since he is outside the tax net. But the middle-class which has been tortured by high inflation for the past 20 months expects and may get some relief from income tax with the exemption limit possibly raised to 200,000 rupees.
Noting that downside risks to Indian economic growth are high, the World Bank on Friday projected the country's GDP to expand 7-7.5 per cent in 2012-13.
"In India, the slowdown in GDP growth witnessed over the last two quarters is likely to extend into the coming fiscal year because of the weakness in investment," the World Bank said in its latest economic update for India.
According to the multilateral lender, the country is expected to see a growth of 7-7.5 per cent in the current as well as next financial years, a sharp slowdown "from 9-10 per cent growth in the run-up to the global financial crisis".
As per official estimates, the Indian economy is likely to expand 6.9 per cent in the current fiscal, much lower than 9 per cent projected during the 2011-12 Budget.
Pointing out that slowdown is at least partly caused by structural problems, the World Bank said that there is a need to overcome the same by enhancing domestic growth drivers.
"Important signals could come from the reform of direct taxes, the implementation of the long-delayed GST, and passage of the land acquisition and mining bills," it added.
Tighter macroeconomic policies, slow growth in the core OECD countries and worries about another global recession, among others also weigh down on growth, the report said.
"The central government is likely to miss the ambitious target for fiscal consolidation it had set in the FY 2011-12 budget by about 1 per cent of GDP.
"Slippages are due to lower-than-expected revenues and increasing outlays on subsidies, which had been given low budgetary allocations in anticipation of strong policy changes, which failed to materialise," it added.
The session, which will last till May 22 with a three-week break from March 31 to April 23, is expected to witness heated debates over what some opposition-ruled states see as centre's efforts to usurp their powers through the National Counter-Terrorism Centre (NCTC). Meanwhile, Mamata Banerjee seems inclined to take off the mantle of the UPA's nightmare ally. "We are not traitors," the feisty Chief Minister of West Bengal has been quoted as saying in a newspaper interview. In what would come as a relief for the Congress, West Bengal Chief Minister Mamata Banerjee has laid to rest all speculation of a possible withdrawal of her party's support to the UPA.
Raise the exemption limit, reduce tax rates, raise medical reimbursements, more in-hand savings, more employment and investment opportunities are some of the wishes an "Aam Aadmi" expects from the Finance Minster in the forthcoming budget for the financial year 2012-13, reveals an ASSOCHAM survey.
The Congress on Friday accused regional parties of trying to destabilize the Centre, but lowered its pitch on the post-poll violence in UP in what seemed to betray its concern over talk of mid-term polls that has spiked after its dismal show at the hustings.
Speculation about mid-term polls received a boost when Trinamool Congress's representative in the Union Cabinet , railway minister Dinesh Trivedi, called it a strong possibility since most state leaders appeared in its favour. Although Trivedi clarified that his remarks to a newspaper merely reflected his personal analysis, the Congress did not see the development as innocuous.
Close on the heels of Union Railway Minister Dinesh Trivedi speaking about mid-term elections, West Bengal Chief Minister Mamata Banerjee has asserted that the party is "not a traitor" and does not want mid-term polls.
A Bengali daily, Anand Bazar Patrika, has quoted Banerjee as saying that the Trinamool Congress does not want to snap ties with the Congress and put the UPA in trouble at the Centre.
According to the report, the Trinamool Congress chief was upset with the comments of Dinesh Trivedi on the mid-term elections. She was pacified after the Union Minister clarified by saying it was his personal opinion and not that of the party.
The common man was put on the pedestal for the first time in 2009 with emphasis on inclusive growth. His main interest is really on the expenditure side of the budget since he is outside the tax net. But the middle-class which has been tortured by high inflation for the past 20 months expects and may get some relief from income tax with the exemption limit possibly raised to 200,000 rupees.
The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is a major initiative which benefited the common man in rural areas and created a shortage of labour about which the Minister of Agriculture had a lot to complain. MGNREGA involves an annual expenditure of 400 billion rupees and, combined with the proposed food security bill, will address the poverty issue squarely.
There is a possibility, however, that some other benefits extended to the common man may be curbed. That is true, for instance, of subsidies on kerosene, diesel and LPG which involve huge expenditures and have made the Finance Minister spend sleepless nights. Subsidies mop up nearly 30 percent of the tax revenue, leading to a sharp increase in revenue deficit which, in the first 10 months of the current year, has already exceeded the budget provision.
The shortfall in resources with the government and the 400 bps increase in interest rate on private debt combined to reduce investment in the economy. In the fourth quarter of 2011, investment dropped from 30 to 28 per cent of GDP. Industry is not inclined to add to capacity because demand for homes, for white goods, automobiles, and so on which are purchased on credit has shrunk. The result? GDP growth is down to 6.1 percent.
The conditions today are almost like those in 2009. There is an immediate need of course correction. It is legitimate for industry to expect that the Finance Minister will budget for investment-linked incentives like an increase in the rate of depreciation, reduction of Minimum Alternative Tax (MAT), cut in corporate tax and Securities Transaction Tax (STT), which together can pep up capital market, investment and growth.
Expectations are high for reforms since the next budget may be the last opportunity for the UPA government before the next general elections. The Finance Minister may bring back FDI in multi-brand retail and allow private airlines to go in for foreign equity.
Wish lists do not generate revenues and the Minister will have to scout for new sources of funds to reduce the deficit. Two are most likely — extension of service tax to all services with a negative list and increase in excise duty from 10 to 12 percent to bring it in alignment with the Goods and Services Tax (GST).
A majority of employees surveyed expect Finance Minister Pranab Mukherjee to increase the income tax exemption limit to Rs 3 lakh in the upcoming Budget, in line with rising inflation, Assocham has said. A parliamentary panel has submitted its recommendations on the Direct Taxes Code (DTC) bill, potentially giving the government leeway to please taxpayers in the March 16 budget and win back favour after suffering severe setbacks in recent state elections.
If the recommendations of the standing committee on finance headed by senior BJP leader Yashwant Sinha are accepted, nearly 90% of taxpayers will drop out of the tax net while others could see their tax liabilities come down.
The committee has suggested that the basic exemption limit be raised to Rs 3 lakh from Rs 1.8 lakh now and income up to Rs 10 lakh attract only 10% tax. The highest 30% tax slab is proposed to kick in only on income in excess of Rs 20 lakh.
"Over 89 per cent of respondents said the slab of tax-free income has not moved up in line with the real inflation. Therefore, there is a need to increase the basic exemption limit to Rs 3 lakh, as it will spike up the purchasing power of individuals and stimulate demand," the survey by Assocham said.
At present, the income tax exemption limit is Rs 1.80 lakh.
The chamber has surveyed about 500 employees, working in sectors like manufacturing, IT/ITeS, power and FMCG, from cities including Delhi, Mumbai, Kolkata, Chennai and Pune.
A hike in exemption limits will enhance people's disposable incomes, which, in turn, will boost consumption spending as well as savings, the study said.
This issue is likely to bring together unlikely bed-fellows from both the opposition, led by the Bharatiya Janata Party (BJP), and ruling benches, as key allies of the UPA such as Trinamool Congress are opposed to the idea of giving up the state's police powers to fight terrorism to a central agency under the country's home ministry.
The ruling party from West Bengal led by Mamata Banerjee is also likely to give headaches to the UPA on other fronts too. It has expressed its opposition to a cut in fertiliser subsidy, and has spoken against the hike in the prices of petroleum products.
With the Congress most vulnerable following humiliating defeats in key states such as Uttar Pradesh and Punjab, apart from Goa, the opposition parties are likely to go in for the kill - by attempting to forge floor coordination with some recalcitrant constituents of the UPA to embarrass the government on critical issues.
The ruling party leaders including Prime Minister Manmohan Singh and UPA chief Sonia Gandhi face an uphill task, as the biennial polls to 58 Rajya Sabha seat from 15 states will be held on March 30, even as the parliament is in session.
During the three-month session, which will begin with the customary address by President Pratibha Patil -- her last as she retires in July - to the joint sitting of the Lok Sabha and the Rajya Sabha, the government will try and get the 2012-13 budget passed.
Finance Minister Pranab Mukherjee will present the budget March 16, and the country's Economic Survey will be tabled on March 15.
The rail budget will be presented on March 14 by Railway Minister Dinesh Trivedi, whose remarks on the possibility of midterm Lok Sabha polls will find an echo in parliament, though he later made it clear that his party did not want to pull down the UPA government.
After the budget is presented, parliament will take a break to enable debates of demands for grants of various ministries by the respective standing committees.
BJP's Leader of the Opposition in the Lok Sabha Sushma Swaraj has already complained during an all-party meeting convened by Speaker Meira Kumar about the short duration Budget Session's first phase when her party and other opposition want to raise several issues of national concern.
Parliamentary Affairs Minister Pawan Kumar Bansal, though, informed that the government will be ready to debate any matter that the opposition may want to bring up on the floor of the two houses of parliament.
5 MAR, 2012, 06.19AM IST, MYTHILI BHUSNURMATH,ET BUREAU
Budget 2012: The best rule in taxation is to keep it simple & straightforward
February is normally a month when lobbying for tax sops reaches a crescendo. But this year, it has been quieter than usual. There is a reason. Budget 2012 is slated to be presented on March 16 instead of February 29. So, there is still time to catch the FM's ear.
Congress leaders in their wishlist have reportedly asked finance minister Pranab Mukherjee to present a 'please-all' Budget. On the personal-tax front, the Parliamentary Standing Committee on Finance has already fired the first salvo.
In its report on the Direct Taxes Code to be presented to Parliament next week, the committee has suggested raising the income-tax exemption limit to 3 lakh with another 3.20 lakh offered as rebate for eligible investments and spending. If the recommendations are accepted, the higher rebate will yield a saving of nearly 42,000 a year for those in the highest tax bracket.
In the same vein, government is reportedly toying with the idea of increasing the limit for investment in infrastructure bonds eligible for tax rebates in order to provide more funds for infrastructure investment. But such a relief will only skew the regime in favour of the better-off sections of society who can afford to invest in these bonds.
As a salaried taxpayer, in a regime where the salaried carry a disproportionate share of the tax burden while a majority of the self-employed and professionals get away scot-free, I must confess to feeling elated at the Standing Committee's recommendations.
But is it a case of private gain for public pain? Can the government afford such generosity in a scenario where the Centre's tax/GDP ratio is only 10%, down from 12% in 2007-08? Worse, tax expenditure or revenue foregone on account of various tax concessions was an astounding 4,82,432 crore, or more than the entire fiscal deficit for 2009-10.
Back in 1974, the late Dr Amaresh Bagchi, writing in The Economic and Political Weekly, had argued eloquently against tax sops, saying, "No one bothers to inquire what is the cost of the tax incentive to the community and whether it actually begets the intended benefit and whetherit is the best method of extending state support for a particular activity."
The same sentiment finds place in the Consultation Paper of the Task Force on the Direct Taxes Code and a research paper by the National Institute of Public Finance and Policy (NIPFP) - Raising the Tax-Ratio by Reining in Tax Breaks: An Agenda for Action, Amaresh Bagchi, Kavita Rao and Bulbul Sen - both of which make a strong case against riddling the tax regime with exemptions.
This is what the Consultation Paper of the Task Force on Direct Taxes had to say on tax incentives: "First, there ishardly any evidence to prove that tax incentives have, per se, increased investment or saving - for which these incentives were devised. On the contrary, the corollary has been proven very often - namely, scaling back of tax incentives and exemptions have almost always had a positive effect on tax policy, tax revenue, tax compliance and tax administration."
Additionally, tax incentives lead to a huge number of disputes and litigation. The fewer the tax incentives, the less is the discretionary space available to tax administrators and less is the scope for corruption.
http://economictimes.indiatimes.com/opinion/columnists/mythili-bhusnurmath/Budget-2012-The-best-rule-in-taxation-is-to-keep-it-simple-straightforward/articleshow/12141703.cms
Moneycontrol » News » Business » Economy
Pranab Mukherjee: Can Budget 2012 shake off economic gloom; fix our problems?
Published on Sat, Mar 03, 2012 at 16:08 | Source : CNBC-TV18Updated at Tue, Mar 06, 2012 at 15:52
A few weeks left for the Budget. What sort of reforms does India need to shake off the gloom and stagnation of the past many months and what might the Finance Minister (FM) be willing to consider at Budget time. Hopes are always high but will they be dashed or will they blossom? Will the Budget carry the Prime Minister's footprint or will it cater to populism?
Former advisory to the FM and research director of IDF - Dr Shubhashis Gangopadhyay; the secretary general of FICCI - Dr Rajiv Kumar and member of the IAS, former DIPP secretary- RP Singh discuss these pressing questions with CNBC-TV18's Siddharth Zarabi.
Below is an edited transcript of their interview. Watch the accompanying videos for more.
Q: The Prime Minister in his New Year address outlined five challenges for the country. This was the PM who was speaking at a time when he was under considerable political pressure. He talked about economic security, food security, ecological security, livelihood security and national security. The Budget obviously cannot deliver on all of this. What do you think is the present situation which the FM needs to address in the forth coming Budget?
Singh: In my view, there are so many issues right now which one single Budget cannot fix. We need basic structural changes in the economy, a number of policies have to undergo a lot of change. The kind of problems the FM is going to face right now while making the Budget is the current account deficit because it is going to exceed 3% right now which is a very worrying thing. The fiscal deficit is going to be very difficult to manage. We targeted something like 4.7% last year and we are already exceeding 5.5%.
Put together with the fiscal deficit of States, it's going to be very difficult to manage. Interest rates have become very high artificially but it was not required when inflation was driven by primary commodities, mainly agriculture commodities. The increase in interest rates has resulted in carrying this inflation into the secondary commodities now.
Investments have not been taking place for quite sometime, the government's own investment is coming down, the revenue expenditure is going up like anything, the net expenditure and capital is much less, it's actually coming down every year and private investment is not taking place. It's going to be very difficult for us to grow at the kind of rate at which we are expected to grow. The issues which the PM has mentioned are those that can be taken care of provided the economy grows.
Q: Do you think the Budget can deliver on moving out of this phase of gloom and despondency? The industry is reacting to what the government is doing, the government is going consistently in a sustained manner after industry which is losing confidence. Can the Budget deliver? Is it up to Pranab Mukherjee to do something about it?
Kumar: The question is not - can the Budget. The question is that the Budget must do this because the fact is private investment in the economy hardly grew at all in 2011-12. In the first half's growth is 3.5% and the Prime Minister's Economic Advisory Council (PMEAC) is saying that in 2012-13 they expect this to grow at 9%. So a threefold increase in the rate of growth of private investment is what has been contemplated. You cannot achieve that if the sentiment in the private industry remains where it is at the moment.
The finance minister just has to do whatever he can from the election results on March 6 to 16 to lift this sentiment. My fear is that the slight turnaround that we have seen at the beginning of this year in the market, in the rupee appreciating again, in some of the things becoming a little positive could create a sense of complacency that all is well again. It is not that all is well.
Therefore, what I request the finance minister to do is not make this Budget again a statement of accounts of the government but make it a statement of policy intent and to show that there is economic leadership in this government. What the market is looking for, what the private sector is looking for is a sense of leadership and direction in a situation where you seem to appear to be almost rudderless as far as the direction of economic policy is concerned.
Q: Can the finance minister deliver in the manner that our panelists spoke about and will all be well eventually?
Gangopadhyay: I don't know whether the finance minister can deliver. That's up to him. Having been a part of the finance ministry is irrelevant here. I do agree with what Singh said on the interest rate, that there is very little that the finance minister can do. He talked about investments and a growing confidence of businesses growing enough to make investments which usually bear fruit in a few years time. That confidence has to be brought back and how much the finance minister himself can do is not well-known except for the fact that he is a senior leader, he does have the ear of the PM.
Hopefully, the way he presents the Budget, the things he does in the Budget would be able to create that sense of confidence or lack of it. One of the things that he could do which would definitely generate a lot of excitement is where a lot of expenditure is going in all the social programmes that we are undertaking.
Those have to be done and will be done and this is within the realm of what the finance ministry can do. The issue is how those expenditures are made, how these leakages are taking place and how they are going to the wrong people.
Q: Which are beyond his administrative control?
Gangopadhyay: No, they are absolutely not.
Q: Why do you say that?
Gangopadhyay: Because he can devise mechanisms by which they will be monitored. That is what the finance ministry can do.
Q: But we speak about that every Budget. There use to be a practice of presenting outcome Budgets which has mysteriously disappeared over the last two-three years?
Kumar: One thing I want to say is what he should not and what he must not do is to give a signal that by allocating resources to new schemes it will enlarge the fiscal deficit and will trap this country and the economy.
Q: Are you talking about the Food Bill?
Kumar: Absolutely, because if that is done then the basic expectation from the Budget moving toward fiscal prudence and reversing the fiscal profligacy that you have will be gone. The markets have given the benefit of doubt to the finance minister and to the government at this point of time and if something like that happens that you get much greater allocations on flagship schemes of this order and you don't trim any of the schemes then I am afraid that would be for me a complete no-no that this Budget should have.
http://www.moneycontrol.com/news/economy/can-budget-2012-shake-off-economic-gloom-fix-our-problems_676213.html
Pro-reformist Budget will put economic growth on fast track
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Business LineMr V. Balakrishnan, Chief Financial officer, Infosys Technologies
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We need a pro-growth and pro-investment Budget that is a statement of hope, says V. BALAKRISHNAN, CHIEF FINANCIAL OFFICER, INFOSYS
March 7, 2012:
In India, the Union Budget is not only a statement of fact but also a statement of hope. The Union Budget 2012 will be closely watched, given the background of slower growth in the economy led by global uncertainty.
The country had seen a growth rate of 6.1 per cent in the recent quarter and is witnessing a clear investment-led slowdown in the economy.
This is the last chance for the Government to come out with a reformist budget, ahead of the general elections in 2014. However, the setback to the ruling party in the recent State Elections could result in the Finance Minister focusing more on populist policies.
The fiscal deficit is expected to remain above 5.5 per cent this year and with the global slowdown it could continue to remain above 5 per cent next year as well.
With this background, the Union Budget for this year has greater relevance and importance in determining the course of the economy in the near future.
In my opinion, the Finance Minister should focus on the following in Budget 2012:
CAPITAL EXPENDITURE
The capital expenditure to total expenditure which is a measure of capital spend by the Government, fell from 18 per cent during fiscal 2001-2008 to 13 per cent in fiscal 2012. At the same time, the Government increased its borrowings, crowding the private sector's borrowing. What this means is that the Government spent less on capital expenditure while bloating non-Plan revenue expenditure. This trend needs to be reversed.
SUBSIDIES
The subsidy expenditure as a percentage of total receipts of the Government increased from 13 per cent in fiscal 2001-08 to 30 per cent in fiscal 2012. With the Government talking about the "Right to Food Act", this subsidy bill can only go up further.
Also, the Government grossly under-estimated their subsidy bill in the Budget and the final subsidy bill for the year may well be much higher than the budgeted amount. There is a clear need for the Government to prune subsidies, target them to the needy, cut down waste and make sure not to fall into temptation of being populist and bloat the subsidy bill even more.
There are several big ticket reforms which are stuck at various stages. The major ones are GST, DTC, the New Companies Bill, etc. GST is one reform which will create a common market and transform the country. However, there is no clear timeline for implementation of any of these reforms.
We all understand that it takes time for the Government to build consensus and implement reforms; however, the country expects a clear timeline and comfort on pushing through some of these.
REMOVE TAX SOPS
The total tax revenue foregone by the Government for fiscal 2010 and 2011 were Rs 4,82,432 crore and Rs 5,11,630 crore respectively. Of that, around Rs 72,881 crore and Rs 88,263 crore is basically due to corporate income tax.
A country with such a high distortion in income levels cannot afford to have such a huge amount of tax incentives available to its corporates.
The DTC was aimed at removing these distortions and simplify the tax laws. While the DTC may take some time to implement, I think the Government should take steps to remove all these tax incentives which will help them to focus on fiscal consolidation. While doing this, the Government should also reduce the corporate tax rate by removing all surcharges applicable on the basic tax rates.
TAX DISPUTES
Today, the process of settling tax litigation is onerous and time-consuming. There is no accountability in the tax system for making frivolous demands. This has resulted in crores of rupees pending as tax arrears for the Government. The DRP is a good step in that direction but it needs more strengthening and independence.
INDIRECT TAXES
With inflation so high and economic growth declining, there is a need to reduce (or, at least, resist the temptation to increase) any indirect taxes. This will make sure there is enough disposable income in the hands of the citizens which could, in turn, propel consumption and thereby aid growth.
In short, all we need is a pro-reformist, pro-growth and pro-investment Budget which will put the country on high growth trajectory.
Keywords: Union Budget 2012, India Inc's Hopes, Indirect taxes, Budget expectations,
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Economy and Politics
- Posted: Fri, Mar 2 2012. 10:59 PM IST
Compensation row may further delay GST roll-out
Some sates are demanding CST be again raised to 4% to compensate for the revenue loss
Remya Nair
New Delhi: The Centre's refusal to further compensate states for the phasing out of central sales tax (CST) could worsen relations between the two and further delay the roll-out of the goods and services tax (GST) in India.
With some states like Maharashtra hardening their stance and demanding that CST be again raised to 4% to compensate for the revenue loss, the meeting of the empowered committee of state finance ministers in Delhi on 3 March will be crucial in deciding the road ahead for GST.
CST compensation has been a bone of contention between the central government and the state governments with the former insisting that payouts were linked to the implementation of the GST.
States had cut CST to 2% from 4% as part of the gradual phase-out of the tax for facilitating the transition to GST; the central government compensated them for the revenue forgone.
But with no certainty on the implementation date for GST, the centre is reluctant to indefinitely compensate states.
In a letter to the empowered committee dated 27 January, finance secretary R.S. Gujral informed states that they will not be paid any CST compensation from the year 2011-12 onwards and the payout for 2010-11 will be restricted to the Rs6,394 crore that had already been paid.
Sushil Modi, chairman of the empowered committee of state finance ministers, wrote to finance minister Pranab Mukherjee on 14 February opposing the Centre's "unilateral" move and said the decision was likely to "adversely affect the process of tax reforms in the country including the introduction of GST in India".
States have demanded that CST compensation continue until GST is implemented.
"Maharashtra has raised the issue of increasing CST. The empowered committee will discuss the issue and take a call," Modi said.
GST is India's most far-reaching tax reform and aims to integrate the country into a common market by dismantling fiscal barriers between states.
The introduction of GST is expected to lower the cost of doing business, which will eventually translate into lower prices for customers. But its implementation has been delayed from the original date of 1 April 2010 because of differences between the centre and state governments.
Analysts said that increasing CST could be a regressive step.
"Compensation can only be a temporary arrangement. The central government does not have unlimited resources to fund states," said Vivek Mishra, leader of indirect tax at accounting and consulting firm PricewaterhouseCoopers.
"Also, even if states see a fall in revenue due to CST phaseout, it is compensated by revenue from taxing services," he said. "Increasing CST will be a setback for the GST process. But the impact will be limited since GST is unlikely to be implemented in the next fiscal."
The empowered committee is also likely to further discuss the issue of taxing services based on a so-called negative list approach.
Though the committee at its previous meeting in Bhopal in January had given an in-principle approval to tax services based on a negative list, some issues such as the definition of services are yet to be sorted out. In a negative list-based approach, services not mentioned in the list are taxable.
http://www.livemint.com/2012/03/02225246/Compensation-row-may-further-d.html
AP
Bail us out! UB bossman Vijay Mallya strikes a charitable poseECONOMY: TAX THE RICH
What Is Thy True Worth?
The Indian rich class isn't paying its fair share of taxes. The time has now come....
http://www.outlookindia.com/article.aspx?280012
Liquor barons they both are, but Vijay Mallya and Ponty Chadha have many other things in common. They're both so wealthy that the moniker 'filthy rich' would happily apply here. They are also in the news for all the wrong reasons. The flamboyant Mallya's floundering Kingfisher Airlines will most probably fly for some time longer thanks to bailouts funded from tax payers' money. A large chunk of Chadha's enormous wealth comes from cornering the liquor distribution in Uttar Pradesh. A recent 'surprise' I-T raid on him yielded a piffling Rs 10 crore or so (Chadha reportedly has mock 'raids' regularly conducted on his residences to see how fast evidence can be removed).
So shouldn't these two gentlemen pay higher taxes than, say, the senior executives in their vast business empires? At a broader level, isn't it time that India's super-rich contribute a fair share to tax revenues (just last week finance minister Pranab Mukherjee admitted they needed to grow faster)? Two decades after liberalisation, this question is being asked with increasing frequency, within government, by economists, tax experts and social commentators. Many are convinced wealthy people and corporations need to be taxed more, plus several say they should also lose the big tax breaks.
Last year, former FM P. Chidambaram suggested that the wealthy be asked to shell out more. Some of our leading tax economists have made a case for reintroducing an estate tax (on the value of all assets a person held at the time of his/her death). There's increasing talk of stepping up surveillance on goods and services consumed by the wealthy. These demands are backed by strong arguments, political, economic and moral ones. It's no coincidence that this sentiment comes after a wave of public anger at corruption driven by some large companies and, obviously, very wealthy people.
"Yes, there is a need for governments to tax the rich more than they do," says Deepak Nayyar, economist and former chief economic advisor to the government. "Typically, tax rates on the super-rich are low. It's just as true in India as in the US. As Warren Buffett rightly put it, tax as a proportion of income is much lower for him than for his secretary!"
The growing wealth and power of India's richest is more than apparent. The top one per cent—a mere 12 million people or so—accounted for 5 per cent of the national income in 1980. In '05, this share went up to 12.5 per cent; and was pegged at about 15 per cent in 2010.
 *"There's no need for long-term capital gains from equity sale or dividend incomes to be exempt from tax." Deepak Nayyar, Economist |  *"In an economy with jobless growth, subsidies for the rich on grounds of job creation cannot be justified." Arun Kumar, Black money expert | |
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 *"We made several representations to stop taxing the poor and the rich at same levels; a UPA-corporate nexus nixed it."D. Raja, CPI |  *"An exemption, once it's on, stays on forever as lobbies come up. It's best if tax exemptions aren't introduced at all." Janmajeya Sinha, BCG | |
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 *"I am in favour of an estate tax, it should be there. But I don't know enough about other taxes to say more." Khushwant Singh, Writer |  *"Having people who earn just Rs 8 lakh in the top tax-payer bracket isn't on...incomes hit stratospheric limits after that."Gul Panag, Actress | |
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 *"Don't confuse poverty, hunger, inequality. Each needs a policy intervention of its own, just raising taxes will not do." Arvind Virmani, India Representative, IMF |  *"Govt is unlikely to change things in a big way on exemptions or subsidies. The economy just isn't that buoyant." Dinesh Kanabar, Tax expert, KPMG | |
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 *"The problem India has always faced is that of expanding the tax base, not the tax rates, which seem quite fair." Sanjaya Baru, Economist |  *"Our tax levels are fair considering income levels; though dividends and profits from stocks and shares will need review." Kiran Mazumdar Shaw, Biocon | |
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 *"The politician, industrialist and the media are responsible for the corporate subsidies and tax write-offs...." P. Sainath, Commentator |  *"This 'let's get them' idea is fundamentally flawed. You can't have a tax law for just one guy or a hundred." Surjit Singh Bhalla, Economist |
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| *"Too many people are not in the tax payer category— businessmen, industrialists, self-employed, professionals." Dipankar Gupta, Sociologist |
It's clear that a very small number of people have really enjoyed the fruits of economic reforms. The poor, meanwhile, climb over the poverty line at a snail's pace of one per cent a year. Prof Arun Kumar, an expert on India's 'black' or tax-free market, says "India's wealthy have grown both in size and prosperity. They can afford higher rates and do without exemptions".
India's situation mirrors a similar rise in inequalities in many countries, from the US, UK, Germany, France, Mexico, China and so on. Many major economies—notably the US, France, and Spain—are looking at ways to tax the super-rich. Americans, for instance, are growing increasingly frustrated with their tax system. A Pew Research Center 'People & the Press' survey in December found that the frustration is driven not by their own tax dues, but the perception that the rich aren't paying their fair share.
Alan Viard, resident scholar at the American Enterprise Institute, says, "The increase in inequality the US and other countries have experienced during the last few decades spurs concern about fairness in taxation." US President Barack Obama wants to raise taxes on those making more than $2,50,000 a year by letting the tax cuts instituted for them by George W. Bush expire. He opposes eliminating the estate tax, but would like to increase the exemption level to $5 million and lower the top rate to 35 per cent. And he wants to put in place the 'Buffett tax' to ensure that those who make more than $1 million pay their fair share.
But by what yardstick should India's elite class be taxed? Should it be a higher slab of income tax (say 40 per cent) for the super-rich? Or is there a case for an estate tax, which was discontinued in pre-liberalisation 1985 due to poor collections and loopholes? Some experts have also pointed at increasing the scope of the wealth tax (today's one per cent earned a measly Rs 635 crore in 2010) and the obvious issue of fewer tax exemptions to the wealthy and corporations.
It's not like there's a consensus on the prescriptions. In fact, taxes on the wealthy are so highly contested that debating points are added up even to identify just who the rich are. Besides, there's an implicit threat: what if you tax too much and entrepreneurs shut shop? Or what if a loophole—like charitable trusts, for instance—are employed to evade taxation? And then, of course, there's the fear of increasing black money in an economy that already has so much of it. Any change in the taxation policy would have to take all these concerns to mind.
Nita Ambani, left, Anuradha Mahindra and Parmeshwar Godrej at a polo match. (Photograph by Fotocorp, From Outlook, March 05, 2011)
Increasing the rates would also run contrary to the core tenet of Manmohanomics: increase 'base' or number of taxpayers, reduce tax rates. This is what India has been doing since the '90s. Is it now time to relook this taxation tenet?
"So far, there's no evidence to show this (approach) hasn't worked," says Dr Arvind Virmani, executive director, India, IMF, and ex-chief economic advisor in the finance ministry. "Often, there are demands for higher taxes on a section of people or industry, when really what you need is a policy intervention to sort out a more fundamental problem." The argument here is that as the economy grows, the value of many things may increase, but if the value of some things (like land) spiral out of control, something must be wrong. But is tax the answer? "A tax in such situations will penalise people who did nothing to elevate the value of, say, the only home they own. That's not the way to go. The answer is to supply more land so that prices come down—a policy response, not a tax one," Virmani says.
But experts find plenty on this front to fault with in India's taxation policies. Like many Indians pay a much higher average rate of tax on earned income than on unearned income (which is taxed at lower rates as there are too many exemptions and deductions). Several expertsOutlook spoke to—including Thermax's Anu Aga, Biocon's Kiran Mazumdar and journalist P. Sainath—acknowledge that this must change. "For instance, why should capital gains on investments in equity, or dividend income, get a tax break at all? This is the government's way of encouraging speculation among the wealthy," says Sainath.
The finance ministry's statement of 'revenue foregone', published with the budget since 2007, details all tax concessions. Last budget, it said corporate income-tax breaks were roughly Rs 88,000 crore. These should be tackled. Personal income-tax breaks were huge too—33 per cent of the said proceeds. Despite these exemptions, all the experts agree that a higher percentage of tax within the economy (what economists call 'tax-GDP ratio') is the only way to wind up with a surplus down the line. (At 17 per cent, India's tax-GDP ratio compares poorly with UK's 34, US's 24 and Germany's 37 per cent.)
The problem is those who don't pay (income) tax are everywhere. Only 3 per cent actually do, and that includes the self-employed, professionals and businessmen. Income from agriculture is constitutionally tax-free. Worse, there's no denying the system is unfair. Those who earn more than Rs 8 lakh a year are taxed at the highest rate—roughly 30 per cent—same as an ultra-rich Ambani. There are numerous opportunities to evade paying taxes. Businessmen can conceal income as 'cost' of doing business, cutting their personal tax liability. The salaried have no such luck. Their tax is deducted before the paycheck arrives.
One way, perhaps, to effectively tax the rich is to consider an estate tax, a topic that has been coming up among India's taxation experts in recent months. This tax—on the value of a person's estate, subject to a threshold limit—is present in many major economies the world over. In an interview to Outlook last year, leading tax economist Vijay Kelkar had advocated Rs 50 crore as a threshold limit—others feel even Rs 20 crore would be a good staring point. Dr Ajit Ranade, chief economist and head of research, Birla Group, agrees that estate tax is the "big one" India doesn't have.
An earlier experiment with estate tax had failed—it was complex, had a low base, the tax burden was too high. But in post-liberalisation India, experts agree the pickings could be enormous. "It can be huge. High-value properties worth hundreds of crores are scattered across the country, constantly changing hands," says Nitin Baijal, director, bmr Advisors.
But the worry, of course, is that any new tax means a new tax administration to track each transaction. And there are the potential 'loopholes'. "Now you're entering the zone where we ride into the cloak-and-dagger 1970s era," cautions Surjit Singh Bhalla, managing director, Oxus Research and Investments. He says there is scope to raise tax revenue, but largely through indirect, professional and service taxes. On another front, factor in the massive exemptions—Rs 5.3 lakh crore ($10 billion) last year—and the effective tax rate on wealthy companies distills to something like 22.2 per cent. Corporate watchers admit that concessions, though time-bound when introduced, tend to stick around forever.
So, finally, if very few pay taxes, evasion is relatively easy and exemptions linger on, how can India tax the wealthy more? Well, whether the super-rich like it or not, the search for answers has begun.
PRO-VIEW
Reduce Corporate Tax Exemptions
PRANAB BARDHAN | Prof of Economics, Berkeley
When you talk about the burden of taxes in India being borne by only 3 per cent of the population, you are mainly talking of direct taxes. In fact, the entire general population bears the burden of indirect taxes which are levied in the form of sales taxes, different kinds of value-added tax as well as other taxes. I think that there is a lot of scope for increasing taxes on the wealthy in India. Most economists would accept that such taxes can be a major instrument of reducing inequality, but they are often worried about high marginal tax rates inducing large tax evasion. Yet, I think the government could first somewhat raise the rates of capital gains tax in India. Second, the government could impose gift and inheritance taxes and third, it can impose taxes on the large gains coming from the increasing value of land, particularly in urban and semi-urban areas. And, fourth, the government could reduce the large tax exemptions the corporate sector currently enjoys in various forms. It should be kept in mind that the tax-GDP ratio in India is lower than in many other developing countries.
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Why More, When Tax Money Is Wasted
ANU AGA | ex-chairman, Thermax India
I am not against being taxed, because India is a country where the tax-GDP ratio isn't very high and where even dividends are not taxed. However, the more important question is: what is the government doing with our money? Their utilisation of money has been pathetic; hasn't it been said from Rajiv Gandhi's time that 80 per cent of the money for social schemes has not reached beneficiaries? To talk of taxing more in such a scenario makes me think I am better off spending my money on social projects myself. People have become more demanding, but one does not see the government make an effort to change. If government simply keeps introducing incremental rather than systemic changes without going into detail, we will botch the clean-up process too. Sporadic events such as the Anna Hazare movement rose after a few scams came out in the open, but they fizzled out. Does one hear about the Adarsh scam anymore? Yet, these scams are just the tip of the iceberg. Taxing more will not address the root cause of the problem—we must correct the way we spend and we need authentic interventions, not just a new tax.
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We Need Egalitarian Capitalism
SUNIT ARORA | Business Editor, Outlook
Een if you don't think you're that rich, nothing can stop a tax whose time has come. For a society that has witnessed tremendous prosperity over the past two decades, now is an excellent time to debate how to redistribute wealth. Not by force and fear, but in a clear-headed and fair manner. This is not Leftist claptrap or a way to take us back to the bad old days of 97 per cent tax rates. Major economies over the world are making capitalism more effective—and egalitarian. So should we. It's also not a passing fad; in the UK, the idea behind estate tax is at least a couple of centuries old. In India, the sense of entitlement—be it money, land, privileges, tax exemptions—is deep-rooted. People hold on to their wealth. This is often driven by insecurity and helped by governments. That's why we need to tackle this in a focused—and transparent—manner. Go after the really big fish (and don't target taxpayers who have become 'wealthy' in the normal course). The question to be asked is, do we want India to be an emerging economy that debates pressing issues and amends course when needed. Or do we want to be like Russia?
And In The Donor Column We Have...
A lowdown on our Richie Rich sweepstakes and how they can be made to cough up a bit more for the greater good
Who are India's super-rich?
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Billionaires 55 people worth over Rs 4,500 crore ($1 bn) each.
Ultra-Rich 70,000 households worth over Rs 25 crore ($5 million) each.
Globally Rich 1,70,000 people worth over Rs 4.5 crore ($1mn) each.
Well-off Rich 4.5 million households with $100,000 (Rs. 45 lakh) annual income.
Black Economy Those circulating a chunk of the Rs 35 lakh cr black money in India.
Total number of rich Anywhere from 10-20 million people—they are the top 1.9% of the population.
Why should they be taxed more?
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Economics India is poor and the tax/GDP ratio is low. There's scope for taxes to be increased on those who can afford to pay.
Society Fast-growing India has seen the rise of fantastic inequality; taxes can bridge the gap between haves, have-nots.
Global Like millionaires and billionaires abroad, Indian business can volunteer to contribute a higher share as tax.
Politics A host of exemptions and tax breaks for the wealthy distort the markets, jeopardise government credibility.
Are you rich? You are if you...
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Buy watches, pens over Rs 1 lakh, jewellery over Rs 5 lakh, gizmos over Rs 5 lakh, cars over Rs 23 lakh, bikes over Rs 12 lakh.
Go for holiday packages over Rs 10 lakh, or for a destination wedding; yachts and choppers (even on lease).
Give over Rs 5 crore to charity, a temple, educational foundation. Have expensive hobbies like sailing, polo, flying, car-racing.
Have more than a couple of properties in your name, and have bought land/property/
plantations abroad.
Spend more than Rs 20 lakh ($20,000) a year on educating your children and have large investments in art and equity.
How can the rich be taxed more?
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Income tax Have a higher tax rate for the super-rich, say 40% instead of the current 30%, the maximum personal tax rate.
Estate tax Tax on the value of assets of a rich person (above a threshold limit) when he/she dies. Exists in many countries.
Unearned Income Dividend income is tax-free, as is long-term capital gains on equity sale, huge benefits for the wealthy.
Wealth tax Currently 1% on income above Rs 30 lakh, generated just Rs 635 crore in 2010-11. Is being redefined.
Exemptions Removing them for the rich/corporations would generate huge amounts of
revenues.
How the world taxes super-rich
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Estate tax exists in many countries like Japan (70%), South Korea (50%), US (46%), France and UK (40%).
Austerity budgets in France and Italy recently imposed 3% surcharges on incomes of the super-rich.
The US plans to introduce a Buffet rule to ensure rich households pay more tax than middle-class families.
What the extra tax will do
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Current income-tax proceeds are a mammoth Rs 1.7 lakh crore*.
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Corporate exemptions led to Rs 88,263 crore of revenue foregone in 2010-11.
A 5% 'wealth' tax on 1/5th of a person's annual income of Rs 5 crore ($1 mn) will generate approx Rs 50,000 crore a year** (the annual expense on nrega).
*Including surcharge and cess
** Assumption = no exemptions
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By Pragya Singh with Ashish Sen in Washington
http://www.outlookindia.com/article.aspx?280012
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