The Hindu Business Line : HNIs need red carpet, not tax net

THE Finance Minister, Mr P. Chidambaram, is concerned that only 80,000 individuals declare an income exceeding Rs 10 lakh. The Finance Ministry, therefore, will embark on a plan to spy on the various transactions of these assessees with the objective of bringing into the tax net 50 per cent more such assessees (the so-called high-net-worth-individuals, or HNIs) in the course of the next year.

To achieve this laudable objective, I strongly recommend that for incomes exceeding Rs 10 lakh, the marginal income-tax should be reduced to 10 per cent (or less) against the existing 30 per cent; and the Government should give a guarantee that this rate will not be changed to affect assessees for at least five years.

The results will surely be positive. These HNIs will then increase by more than 50 per cent in one year and the income-tax collected from this group will far exceed the current collection.

Bizarre though this suggestion may seem, let me proceed to make a few more points.

HNIs come in two groups — those that amass vast wealth (net worth) by illegitimate means, like the mafia, scamsters, bribe-barons, and plain robbers and thieves. They cannot, even if they wish to, declare these incomes truthfully, file returns, pay 30 per cent income-tax and call it a day. The crime of tax evasion is, in a sense, thrust on them! Then there are those wealthy individuals whose high incomes are earned perfectly legitimately, but who are turned illegitimate simply because they refuse to pay the income-tax. This group consists primarily of professionals, artists, sportsmen, businessmen, traders and salary-earners to the extent that they have non-salary-earned income. These are thus tax-evaders by choice. The present discussion is about this second group.

This group presents an unfortunate paradox. These individuals earn high incomes from perfectly legitimate activities in an open and competitive economy. They are thus making an important contribution to India's economic growth. They are the country's talented citizens, the innovators, the hard workers, and the entrepreneurs. They should be the country's pride.

It is a shame that they chose to throw themselves into the category of tax-evaders. A shame to themselves and to the government. To the HNIs themselves because they stoop to break the tax law which they, like many others, find absurd. Maybe the law is an ass; we are welcome to criticise it and try to have it changed; but we must abide by it as along as it is in force. And it is a shame for the government because such talented and most-able-to-pay citizens are disillusioned at the manner in which they see their hard-earned tax money being squandered.

Some tax consultants to HNIs tell me that they never evade totally; they always under-report. It is highly unlikely that an HNI with, say, a total taxable income of Rs 20 lakh is not income-tax assessed at all. In all probability, he is an assessee showing an income of, say, Rs 3 lakh and concealing the remaining Rs 17 lakh.

These generous HNIs, I am told, also divide their income among kith and kin, to have their tax liability reduced. This seems understandable, and suggests that the HNIs whom the Finance Minister plans to chase are all already in the income-tax net. Thus, he does not have to widen the net but to deepen it and probe further to augment his catch. The probe can be meaningful even within the 80,000-group.

If the proposal of reducing the tax rate to 10 per cent and giving HNIs the assurance that this will not change are implemented:

Every potential HNI will strive and work harder to earn more and show more to get past the Rs 10-lakh entrance exam.

Every actual HNI will strive harder to earn more and show more so as to keep the full 90 per cent for himself.

Sham division of income or its concealing to save tax would be a matter of the past. In all likelihood a welcome reversal may set in; assessees will strive to show more than they earn!

I am sure that among the existing 80,000 HNIs, there are many who neither evade nor under-report. They too will feel rewarded by the lower tax rate, instead of nursing a grievance.

Most important, this will be a red carpet rolled out for the HNIs of today and tomorrow. The Finance Minister, like some of his predecessors, has repeatedly talked of his tax net and its widening. Nets are cast for catching fish and killing them. The fish know this and try hard to keep out of it.

The HNIs, who should be the pride of India, see themselves being treated like fish and obviously hated the idea. They will welcome the carpet; will strive to walk on it; and once on it, never leave the land of appreciation and recognition.

Alas, it is quite unlikely that such a win-win proposal will be accepted and implemented. Why? I see quite a few reasons. Let me mention just two:

First, despite free speech in the country, there prevails what can be called the censorship of fashion. Any proposal which smacks of a lower rate of income-tax on a higher income slab will be termed regressive and, therefore, dumped as reactionary and insane; though, in fact, it will be most progressive because it will surely and vastly increase the number of tax-paying HNIs as well as the tax amount collected from them.

Second, was it not Keynes who said that man would certainly take the right decision, but only after he had experimented with all the wrong alternatives? I guess there are a few yet to be experimented with.

(The author was Chief Economist with the Tata Group.)

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