Will levying new taxes work?
Tax and regulatory services
Ernst & Young
Being the last Budget for this government before the next Lok Sabha elections, one would expect a ‘please-all’ strategy to garner votes in the next elections. While the government is already working on these lines by deferring the General Anti Avoidance Rules (GAAR), discussions on taxing the ‘super rich’ and levying the long-abolished ‘inheritance tax’ are not helping its cause.
Currently, there are a lot of discussions on whether the super-rich – individuals with huge wealth such as legal heirs of politicians, top business executives, successful venture capitalists and celebrities –should pay more taxes than the rest.
The crux here is how would one identify the super rich? Would one’s total wealth be considered to determine the super rich? Or should one consider only the total income? It’s imperative to first decide the threshold limit beyond which an individual could be classified as super rich, so that it’s only the real super rich who would actually bear this additional tax liability. An unplanned implementation would only deter foreign investments into India, which would add to our problems.
Of course, taxing the rich has become one of the easiest ways to raise money around the world. However, foreign countries which tax the super rich have ensured that they have set a very high threshold, e.g. US taxes at 39.6% for income exceeding $4,00,000 ('2.15 crore) and UK taxes at 50% for income of £150,000 ('1.26 crore). Maybe, India should take a clue here.
Inheritance tax is another topic that has gained momentum recently. This is tax imposed on those who inherit money or property from the deceased, or it is a tax on the estate – total value of the money and property – of a person who died.
India used to levy inheritance tax between 1953 to 1985 on inheritance from individuals and Hindu undivided families (HUFs).The minimum slab rate was 7.5% and maximum 40% of the principal value of the estate in excess of '20 lakh. However, the same was abolished as the cost of collection, complexity and litigations involved outweighed the proceeds.
While India is contemplating re-introducing the inheritance tax, countries worldwide are either diluting or abolishing it. Developed countries like New Zealand, Russia and Sweden have abolished the same whereas Norway and Sweden have gone for some dilution. A few developing countries have inheritance tax in their set-up, which includes Brazil, Russia, South Africa and Turkey. China is contemplating introducing it since 2002, however, till today, no statute is passed.
The discussion on taxing the super rich is likely to make India Inc jittery as they have been opposing imposition of fresh burden against the backdrop of a sharp slowdown. According to the finance ministry data for 2011-12, India has only 4.6 lakh tax payers who earn more than '20 lakh as income and pay taxes, and this group accounts for around 20% of the taxes. So, it’s worthless to debate on taxing the super rich as the time and energy would be better spent in framing policies.
Is levying of super rich tax and inheritance tax justifiable? Would it increase revenue as intended? A more objective approach would be taxing people who don’t pay tax instead of those who already pay by widening the tax base. Tax collection from a wider base would lead to a sustainable tax system.
One could also look at increasing investment limits under section 80C of the Income Tax Act to '3 lakh, which can be channelised towards infrastructure projects. The government should focus on implementing goods and services tax (GST), which will add to revenue and take steps to increase its credibility in managing funds efficiently and removing corruption from its system.
(The writer’s views are personal.)