Business Standard

Should there be a super-rich tax?

Related News

Such a tax is vital to the objective of but it is unlikely to yield significantly higher revenues.

Medha PatkarMedha Patkar
Activist, National Alliance of People’s Movements

“The maximum wealth in the country is confined to a handful of people. And yet, a from these people would yield many times more than what indirect taxes now yield”

This year we have completed two decades of economic reforms. Even though there is growing unemployment, declining agricultural and industrial production, rising inflation, economic crisis and inequality as never before, a minority remains untouched by these problems. For this minority of affluent Indians, the country is on its way to double-digit growth and nothing else matters. In the past 20 years, a tiny minority has seen an explosion of choices of luxury and consumer goods, but the vast majority of the population – nearly 80 per cent – lives on less than Rs 20 a day.

While the first step should be to make states plan from the community level, the other important step required is an amiri rekha (affluence line) to replace the garibi rekha or poverty line. There should be a cut-off point for wealth acquisition after which point the wealthy should be taxed heavily at the rate of 12 per cent through a super-rich tax. All wealth should be considered public money of which the wealthy are merely trustees. So, a super-rich tax would reduce some of the inequity in society.

The system of direct taxation on income makes the Indian middle classes believe that they have a larger claim to the services the state provides but the fact remains that indirect taxes, which are paid by everyone, contribute the maximum. According to pro-people economists, the maximum wealth in the country is confined to a handful of people numbering up to 100,000 in a population of 1.2 billion. And yet, a super-rich tax from these people would yield many times more than what indirect taxes now yield. Also, indirect taxes raise prices and all other things being otherwise unchanged, they lower the real value of the earnings of non-payers. By raising inflationary pressures, these taxes have resulted in demands for subsidies in fertilisers, exports and foodgrains.

Only the rich benefit since they have to pay much less direct taxes.

The incomes of the top five per cent in the urban sector and one per cent in the rural sector, who would also be above the amiri rekha, need to be tapped through direct taxes. There is a need to move away from the present structure of a high share of indirect taxes in the tax revenue to a high share of direct taxes. Today, the collection from wealth tax is meagre and, in fact, has been stagnant over the years. There is also a need to revive property tax so that income from work rather than inheritance becomes more attractive. Hence, the property of those above the amiri rekha should be taxed and the direct and indirect tax burden on everyone else should be removed.

The need for a super-rich tax is underlined by the fact that 77 per cent of our ministers (59 out of 77) and more than 300 MPs are millionaires. The average value of a minister’s assets in the current ministry is Rs 10.6 crore. In 2009, the average asset value of a minister was Rs 7.3 crore. This is not a healthy sign for democracy. It means that Parliament has ceased to be representative of the people.

With the reductions in indirect taxes on basic goods, the cost of inputs into agriculture will decline and the lot of farmers will improve. Increased expenditure in social sectors will help enhance the living conditions of the majority of the population. Reduced speculative activities in real estate and lower land prices in rural and semi-urban areas would lead to enhanced access to housing for the less-privileged 80 per cent of the population. They would not be forced to live in squalor and illegality.

The exact modality of taxing the super-rich would be clear when the National Alliance of People’s Movements comes out with its alternative budget soon. We would have not only the super-rich tax but other measures to bridge the income disparity in the country. The vast gulf between minimum wages and maximum earnings in the country should narrow. That is the way forward for the well-being of the majority of the population in India.

As told to Sreelatha Menon

Amitabh SinghAmitabh Singh
Tax Partner, Ernst & Young

“Individual taxpayers in India constitute a mere three per cent of our population.How much revenue can the government expect to extract from this minuscule proportion?”

In today’s environment of economic distress, “tax the rich” has become the slogan for many political leaders and policy makers. The has done it to some extent, the US is debating the issue and I am sure many other countries are following suit.

Listed below are some of the reasons a higher tax rate for the rich may not be effective if the end goal is revenue mobilisation on a large scale to bridge the fiscal deficit:

  • How do you define “rich” in the Indian context? According to the Comptroller and Auditor General’s report for 2006-07, there were about 600,000 individuals with annual income over Rs 10 lakh, comprising a mere two per cent of the total number of individual/non-corporate taxpayers. An optimistic extrapolation will not take that number beyond 800,000 taxpayers at present. The pegs the number of Indian millionaires (individuals with net-worth of Rs 4.5 crore and above) at 153,000. The current maximum marginal rate is 30 per cent applicable on incomes above Rs 10 lakh. Would the government add a slab, say, at Rs 50 lakh and put a tax rate of 40 per cent? I am sure that the total number of taxpayers with income above Rs 50 lakh will not be more than 100,000. Will the incremental revenue be material in the overall context? I doubt it. 
     
  • We have had wealth tax in our statute books for a long time. However, the total wealth tax collection as on date is around Rs 400 crore. Even if one were to double the wealth tax rates, the incremental collection would hardly make any difference. 
     
  • While we keenly look to the US when talking about taxing the rich, we ignore one significant mismatch. Individual taxpayers in India number about 35 million — a mere three per cent of our population. By comparison, 45 per cent of the US’ population pays taxes. How much revenue can the government expect to extract from this minuscule proportion of people? 
     
  • We eagerly talk about taxing the rich but are always silent about taxing our rich farmers. Is anyone surprised that Punjab has the highest number of people in India owning Mercedes? What is fuelling this demand for such high-end luxury cars other than tax-free agricultural income? The necessary constitutional amendments should be passed so that agriculture income is brought under the tax net. Let farmers be given a liberal slab rate, and taxed only if their income exceeds Rs 5 lakh but it is high time that they started contributing to the nation’s coffers since they are enjoying subsidies on account of electricity, fertilisers, loans and so on that are funded from taxpayers’ money. 
     
  • In India, where the government has largely failed in its duty to the large sections of the population in terms of health, education and poverty alleviation, private philanthropy has played a major role in bridging the gap. Just to name a few who come readily to mind Azim Premji and Shiv Nadar may be considered “super-rich” but they are also “super-benefactors”. On a conservative basis, these wealthy individuals would be applying five to 10 per cent of their annual income to funding activities that the government should have taken care of in the first place. The government should recognise this as a key contribution since spending money on basic needs like health, sanitation and literacy is a form of proxy taxation, the only difference being that the money is being spent willingly, more effectively and responsibly. I would applaud any move to grant full deduction for charitable contributions than increasing tax rates for the rich. 
     
  • Indirect taxes (value-added tax, service tax, excise duty) have always been seen as a more effective way of collecting revenues. Their share of the total tax collection has also grown significantly. Today, a one percentage point increase in will garner much than any tinkering with income tax. If the government is serious about mobilising significantly higher revenues, it should not delay in introducing the uniform goods and services tax. That would yield far higher and sustainable revenues than the populist but ineffective move to tax the rich more and more.

These views are personal

Read more on:   
|
|
|
|
|
|
|
|
|
|
|
|

Read More

Subir Gokarn: The impossible trinity?

The Budget tried to please politicians, rating agencies and reformists, and let them all down - slightly

Most Popular Columns

Avirup Bose

Avirup Bose: A case of 'consumer unfriendly' brands
Avirup Bose

Consumer goods companies that boycott discounted sales of their products by e-tailers could be liable for scrutiny by the competition regulator for restricting free trade and customer choice

Akash Prakash

Akash Prakash: Debunking two worries
Akash Prakash

Are India stocks over-owned? And are they too expensive?

Claude Smadja

Claude Smadja: The Tehran deadline
Claude Smadja

Negotiating a sustainable nuclear compromise with Iran is not getting any easier

Advertisement

Columnists

T N Ninan

T N Ninan: How to eat a free lunch
T N Ninan

India is the third largest importer of crude oil, the third largest importer of coal and the fifth or sixth largest importer of natural gas. ...

Abheek Barua

Abheek Barua: A list of risks
Abheek Barua

Many things could play spoilsport for the Indian economy

Sunanda K Datta-Ray

Sunanda K Datta-Ray: Lot 583 and a gift of wings
Sunanda K Datta-Ray

The cancelled auction of Karun Krishna Majumdar's relics is India's chance to bring back timeless treasures belonging to the man known as the ...

Back to Top