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Thursday, 08 October 2015 01:01
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Santosh's edit

FM right to stress role of high taxes in black money


After the fiasco of the one-time compliance scheme forblack money held overseas, it is just as well that finance minister Arun Jaitley has said ‘the bulk of black money is still within India’. Given the vastly higher returns generated in India, especially in comparison with countries like Switzerland, it was always obvious the bulk of black money would find its way back into the country even if stashed abroad earlier—indeed, that is what participatory notes are alleged to be doing. That said, Jaitley does  well to acknowledge that ‘our high taxation regime in the past eventually ended up encouraging tax evasion’, and that the ‘government’s policy is rationalisation of tax structures’. While he has already announced a time-frame for reducing corporate tax rates to global levels of around 25%, he now plans to do the same for personal income taxes. The sooner this is done the better. Apart from the fact that India has too few people paying income taxes—as compared to the 17 crore people who have PAN cards, just 3.6 crore pay taxes, as against the Tax Administration Reforms Commission estimate that at least 6 crore people should be paying income tax.

Indeed, analysis of tax returns in FY12 shows that, while the number of taxpayers reporting income up to Rs 5 lakh comprised 98.3% of the total, they contributed just 10.1% of the tax collected in FY12; those with an income above Rs 20 lakh were just 1% of the total but contributed 63% of the tax collections. The reason why taxes collections are so low is that, with the top tax bracket kicking in very early—at just Rs 10 lakh a year—people in the middle-income brackets tend to depress their income statements to be able to remain in the lower tax slab. Which is why the Direct Taxes Code Bill, 2009, had proposed income between Rs 1.6 lakh to Rs 10 lakh to be taxed at 10%, between R10 lakh and Rs 25 lakh at 20%, and that over Rs 25 lakh at 30%—and doing away with several tax deductions such as those on investments in life insurance or provident funds and interest paid on housing loans. Apart from making better use of the annual information returns that tell the taxman how much money PAN-holders are spending on big-ticket items, Jaitley’s other plan, of considering making mandatory the furnishing of PAN details for cash transactions beyond a certain limit, also has to be implemented at the earliest since there are large cash transactions in property purchases/sales—the FM has said the taxman’s ability to detect large cash withdrawals/deposits from/in banks is also being strengthened. Ideally, real estate should be made part of GST where avoidance becomes very tough, but given how much politicians’ money is supposed to be invested in real estate, that will probably take a long time.


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