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The taxation silly season is here PDF Print E-mail
Friday, 11 January 2013 01:21
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High taxes on the rich is the latest fad, but it is a waste of time

One of the biggest constants at the budget time of each year is to talk of how low India’s tax-to-GDP ratio is. And with the naturalness that comes from being so bright, we know how to fix this. Just look at Mukesh Ambani’s Rs 1,23,000 crore of wealth — a euphemism for the market value of the Reliance shares various companies controlled by him own — just tax this at 10 per cent and India’s personal income tax collections will rise 8.3 per cent. Then there’s Ratan Tata, Sunil Mittal, Azim Premji; never mind that while taxes are levied on incomes, Mukesh Ambani’s “wealth”, even if the number were to be true, is, however, the sum of his accumulated savings, on which taxes have already been paid earlier, during the income-generation phase.

If this taxation silly season wasn’t bad enough, the current global fad seems to be soaking the rich. In France, Francois Hollande wants to tax the rich at 70 per cent rates and in the US, Barack Obama has succeeded in his attempt to tax the rich at a higher rate. There are several “facts” to support the argument, needless to say — while India’s tax-to-GDP ratio is under 17 per cent, Norway’s is 41 per cent, Germany’s 37 per cent, the UK is at 34 per cent and the US at 24 per cent.

But none of these countries have 30-40 per cent of their people below a decently drawn poverty line. Just adjusting for this would take India’s effective tax-to-GDP ratio to 28.3 per cent, a number that’s higher than that of the US. In any case, there are huge variations in tax-to-GDP ratios, even among developed countries. The US’s 24 per cent, for instance, looks tiny compared to Norway’s 41 per cent, but huge compared to Singapore’s 13.4 per cent and Hong Kong’s 13.9 per cent.

The larger point is that tax effort is largely a function of average income levels; as incomes rise, so will the tax-to-GDP. In India, rising GDP growth saw tax-to-GDP rise from 15.7 per cent in 1991-92 to 17.7 per cent in 2007-08. Were this related to the taxman getting on steroids and soaking the rich, the tax-to-GDP rate wouldn’t have started falling in later years as GDP slowed. Which is why India’s 16.8 per cent tax-to-GDP levels are broadly compatible with its peer group — China is at 17.5 per cent, Mexico at 17.5 per cent and Malaysia at 15.7 per cent.

In India, soak-the-rich got a dramatic burst of life when Economic Advisory Council chairman C. Rangarajan came out in favour of it a week ago. On the face of things, it looks appealing. While those earning below Rs 5 lakh paid a total of Rs 15,010 crore in FY12, those earning over Rs 20 lakh a year paid Rs 93,229 crore — just levy a 10 per cent surcharge on the rich and more than half of those earning below Rs 5 lakh can be kept out of the tax net.

But if it were really that simple, the rich would have been soaked a long ago. After all, Indira Gandhi had 94 per cent tax rates and that got us nowhere. Sweat the numbers that are available on personal taxation in different tax brackets a bit, and you get quite a different picture.

First, while our hearts bleed for those who learn less than Rs 5 lakh a year, keep in mind that the tax data shows they comprise 89 per cent of the taxpaying population, but account for just a tenth of personal tax collections. Those who earn over Rs 20 lakh a year, in contrast, comprise just 1.3 per cent of the taxpaying population but ended up paying 63 per cent of the total personal income tax collections in FY12.

Second, if you look at those earning between Rs 10-20 lakh a year, the average tax they paid in FY12 was Rs 1.3 lakh, or just 8.6 per cent of their average incomes. If this is not huge tax evasion, what is? Even if you assume an average annual income of Rs 1 crore for those taxpayers who report incomes as over Rs 20 lakh, their tax incidence was still an impressive 23 per cent — income tax data show an average tax payout of Rs 23 lakh for each person in this group.

It gets more interesting when you look at the number of rich people in the country. Since the government doesn’t collect data on incomes, you have to rely on theoretical models based on what data is collected. Such estimation by economist Surjit Bhalla suggests there are 8.9 lakh persons in India who earn more than Rs 20 lakh a year (the rich) and 66.9 lakh who earn between Rs10-20 lakh (the quasi-rich). Which means 45 per cent of the rich are paying taxes compared to just 20 per cent for the quasi-rich (and very low taxes at that). Were the compliance ratios among the quasi-rich to rise to the same level as those for the rich, this would give us around Rs 22,000 crore more of taxes, as compared to just Rs 9,500 crore if we put a 10 per cent tax surcharge on the rich. In other words, concentrate on the middle classes, forget the rich.

But why not, to get back to soaking the rich, just tax the rich a bit more. We may get more money by tackling middle class evasion, but surely Rs 9,323 crore more from the rich can’t hurt? Actually, that may not be correct either. Not only is there enough evidence from the world, and India, to show modest taxation is better, a higher tax on the rich just increases the gains to be made by declaring lower incomes — how else do you think the Rs 10-20 lakh group gets away with just an 8.6 per cent tax? Put a higher tax on the rich and their lakhs of CAs will find efficient tax shelters to take cover under — even if you don’t believe the ridiculous Baba Ramdev black money figures, how else do you generate such monies if it weren’t for the helpful CAs?

Being able to double personal income taxes from the rich, no matter how impossible that will be, will get us another Rs 93,229 crore, or 1 per cent more of GDP — getting a tenth of Mukesh Ambani’s “wealth” would add just 0.12 per cent to India’s tax-to-GDP ratio. But moving to a GST, as we saw when we implemented VAT, will end up giving us more. A lot more.

 

Last Updated ( Monday, 14 January 2013 00:41 )
 

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