Should FM introduce taxes to curb runaway fiscal deficit?
The Financial Express
Director, Tax & Regulatory Services
Senior Tax professional
As this Budget will be the last full Budget for the current government before the 2014 elections, it will do all its best to control the fiscal deficit and enhance economic growth. Several recommendations have been made to the finance minister by various commerce organisations. Among the options being considered are a surcharge on income tax above a significantly high threshold i.e., the super-rich tax and levy of inheritance tax. These two options are widely catching good amount of attention in recent debates on Budget expectations.
While the DTC suggests extending the 10% and 20% slabs, Prime Minister’s Economic Advisory Council chairman C Rangarajan has called for higher tax rates for super-rich people.
Finance minister P Chidambaram said: “There is an argument that when the eco, the government requires more resources, the very rich should willingly pay a little more.” The finance minister clarified that he was repeating an argument that he had heard and it was not his view.
At one place he has assured foreign investors that tax rates would remain stable and on the other hand he is hinting at the introduction of new taxes on super-rich people. This concept of taxing the super rich is widely used in the West, especially in the United States and the UK. This concept is based on the ground that an individual earning R10 lakh should not be taxed at the same rate vis-a-vis an individual earning R1 crore. People in favour of the super-rich tax are of the view that the introduction of higher rate of tax for super rich would bring social equality.
India has had higher tax rates in the past but that did not help in maintaining fiscal health. Higher tax rates would refrain new investments into India by foreign nationals. This concept leads to several questions in mind. Who would be considered super rich? Is it only the total income of the individual which will be considered? Or one’s wealth will also be accounted for while levying super-rich tax? It is imperative to first decide the threshold beyond which an individual could be classified as super rich so that truly speaking; it is only the real super rich who would bear this additional tax liability. Before levying such tax it needs to be borne in mind that while countries like the US and UK tax super rich at a higher rate, there are several exemptions/allowances based on marital status, number of dependents, etc allowed before arriving at the final tax liability.
Another option which is under the scanner is the levy of inheritance tax. Inheritance tax is imposed on those who inherit money or property from a deceased person, or it is a tax on the estate (total value of the money and property) of a person who died.
Three decades ago, inheritance tax was part of the Indian direct tax regime along with income tax, wealth tax and gift tax. India used to levy inheritance tax between 1953 to 1985. The minimum slab rate was 7.5% and maximum rate was 40% of the principal value of the estate in excess of R20 lakh.
Bringing equality in opportunity has been the objective of introduction of inheritance tax. The idea is that people with inherited wealth tend to have an unfair advantage over others. Inheritance tax helps in minimising this advantage by ensuring a fair allocation of resource among the people. However, this objective of equal opportunity tends to blend with the other objective of increasing government revenue to be utilised for equality.
Worldwide, inheritance tax has been a matter of debate. Many developed countries such as New Zealand, Russia and Sweden have done away with it whereas countries like Norway and Sweden have diluted it. Very few developing countries have inheritance tax in their regime which includes Brazil, Russia, South Africa and Turkey. Even China had issued a draft rule on inheritance tax in 2002 to solicit public opinion, however, as of today, no statute has been passed to provide guidance on inheritance tax.
There is an anxiety about the reintroduction of inheritance tax in this Budget, as the finance minister himself had initiated discussions on this topic and again contradicted himself in Parliament during a discussion on its introduction. This would considerably add to the government revenue with the increase in HNIs in India and lower administrative costs in implementing and monitoring inheritance tax. Without such a tax, the property of HNIs would be inherited by their heirs, who in turn, would become rich. Thus, heirs of rich stay rich. However, there has to be set rules and reasonable threshold limits to avoid unnecessary hardships to the tax payers.
Will the introduction of super-rich tax and inheritance tax be justifiable? Would this be sufficient enough to increase government revenue? Would this considerably help in reducing the fiscal deficit? Statistics show that less than 5% of the of total tax payers declare income over Rs 10 lakh. Nearly 89% of the taxpaying population is below the Rs 5 lakh threshold. Additionally, tax payers with income over Rs 20 lakh already contribute 63% of the tax collections. Taxing this rich more may not be the optimal policy to substantially increase revenues. To increase government revenue, it is more important to widen tax base, improve compliance and strive for better and effective administration. The government should take steps to encourage better tax compliance. The focus should be on implementing GST, which will considerably add to the government's revenue and is less complex from administration point of view.