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Rajiv Kumar: Taxing the super-rich is lazy policy

It's a short-term fix that will vitiate the investment climate. Why not go after the evaders instead?

Rajiv Kumar 

The issue of introducing a new higher tax bracket for the “super rich” has provoked significant response and, tellingly, none in its support. Let me say with all honesty that I had not heard any of the 10 economists, present at the pre-Budget meeting with the finance minister, supporting it either. Four, including me, had explicitly opposed it. So we were surprised to see press reports saying that economists had supported it. I hope this does not imply that the dye is already cast. Because that would make it a most ill- timed and -conceived proposal for a long while and could reverse the gains made in recent months.

There are two main reasons for the opposition to this proposal. First, it goes completely against the pressing need for improving investor sentiment and the investment climate. Just because we need to increase tax revenues to meet the lower fiscal deficit targets, should we adopt the easiest method of further soaking the rich by imposing a surcharge on those who already contribute as much as 63 per cent of total revenues from personal income tax? No thought has been given to its implications for investor sentiment or to creating a greater incentive for tax evasion that is already high. This is a good example of lazy policy-making that constantly seeks to avoid the difficult options and find the easy way forward for a short-term fix that is bound to have a longer-term, deleterious impact on the economy. In the current situation, which requires a desperate need to increase investment, this would be as disastrous as ordering one more round of retrospective taxation or letting loose the “raid raj” to show the power of the Indian state.

The second reason is that the suggestion ignores the pressing need to widen the income tax net. Of the 250 million households in India, 50 per cent, or 125 million, are agriculture households, so let us assume them to be out of the tax net. Of the remaining 125 million non-agriculture households, 40 million, or 30 per cent, are below the poverty line and let us assume another 20 million to be below the personal income tax threshold. So 60 million non-agriculture households are non-taxable. We know that there are 35 million personal income taxpayers. This still leaves 30 million households that should and do not pay income tax and who should be brought into the tax net. Given that the tax liability of these households can be expected to be similar to that of the existing 35 million, personal income tax collection can go up by at least 90 per cent if the tax net could be appropriately expanded. This will yield far larger revenues than a surcharge on the super rich, as Dr Rangarajan has suggested.

And even this is an underestimate because about 40 per cent of rural households earn more than 50 per cent of their incomes from non-agriculture occupations. Also, the large number of “farm house owners” generally in the vicinity of large cities declare agriculture incomes far in excess of their true levels and must be thoroughly investigated to bring them into the tax net. Moreover, it is clearly wrong to assume that each taxpayer represents an individual household. A large number of households have more than one taxpayer.

Why should the government not make this its main policy objective and initiate a process of thorough income tax administrative reform, which we all know is long overdue? Otherwise all those who pay their taxes honestly feel unfairly treated. This is especially true when it is well known that a considerable number of politicians and crony businessmen have amassed unimaginable amounts of undeclared and ill-gotten wealth. It also demoralises honest revenue officers. And they, thankfully, are still a large – though diminishing – number. They see their dishonest colleagues getting away scot-free after amassing huge amounts of wealth earned by flouting the rules and actively conniving with dishonest politicians, businessmen and bureaucrats.

It was dismaying to hear from the leadership in the ministry of finance that the status quo had to be accepted and we couldn’t hope for “heaven sent” officers who will work differently. It cannot be difficult to design and put in place a system of incentives that will change the behaviour of direct tax officers, to encourage the honest ones and punish those who are corrupt. Today, entrants to the covenanted civil services are said to prefer the revenue services to the administrative and foreign services! This demonstrates a perverse incentive structure, which must be changed. Perhaps a beginning can be made by prosecuting a few in the political and business world who are publicly known to be dishonest, corrupt and sitting on unimaginable amounts of unaccounted wealth. Their wealth should be confiscated and they should be required to spend time behind bars. This will signal the government’s intent to all and sundry.

In this regard, the critical difference between India and the US is that in our case the well-connected and well-heeled always get away, sometimes after a bit of “inconvenience”. In the US, once a person is apprehended for an illegal act, the law comes down with its heaviest hand, irrespective of whether the person is a philanthropist or a member of the president’s inner circle. This is effective deterrence. We have to adopt this model. Otherwise the aam aadmi will snatch away the right to govern and chaos may well ensue. The time to act on reforming the direct income tax department is now. Let’s avoid the easy options. We have done that for far too long.


The writer is Senior Fellow, Centre for Policy Research. These views are personal

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First Published: Tue, January 15 2013. 00:31 IST