The Budget is expected to incorporate the features of the Direct Taxes Code.

The forthcoming Budget of the Union Government is expected to be different from the previous ones, for the reason that it will incorporate the features of the Direct Taxes Code, replacing the Income Tax Act, 1961.

It may be the Finance Minister's last chance to leave his stamp on not just budget-making, but the economy itself. He has expressed his intention not to stand for elections after his current term is done. The Budget for 2013-14 is likely to be election-oriented.


The Flat Tax: It is time that serious consideration is given to the introduction of the Flat Tax, i.e., a common rate for all assesses without any income demarcation. I have written regarding this in the past. Contrary to general belief, it is progressive. To give an example, suppose the threshold for tax is Rs 2 lakh, and the flat rate is 25 per cent. On incomes of Rs 3 lakh, Rs 5 lakh and Rs 10 lakh per annum, the taxes will be Rs 25,000, Rs 75,000 and Rs 2 lakh, respectively. The average tax rates will constitute 8.3 per cent, 15 per cent and 20 per cent, respectively, of the incomes.

It is progressive. For the common man, the average tax burden is important. As far as possible, in the true spirit of the Flat Tax, some other specific exemptions, rebates and deductions should be eliminated. The threshold and the single tax rate should be so fixed that they are Pareto optimal to satisfy tax payers. It is time to realise that savings depend only on incomes, and the rate of return determines the directions in which they are routed.

People will continue to save for socio-economic reasons. Did not people save before the advent of financial intermediation or small savings schemes by burying their money under their pillows? We shouldn't be misguided by the Western models of saving behaviour.

Wealth Tax: The exemption limit was raised on a previous occasion from Rs 15 lakh to Rs 30 lakh with financial assets and one residential house remaining outside its purview. In a poor country, where there are not only rupee billionaires but dollar ones too, the need is to bring financial assets into the tax net, especially in the context of widespread benami (fictitious) transactions to minimise tax. The original rationale for exempting financial savings to encourage them no longer holds good, in view of the development of the country.

According to Forbes magazine of March 10, 2011, the combined wealth of India's 100 richest people is $241 billion. The Nielsen Upper Middle and Rich (UMAR) Survey looked at various parameters, such as employment of domestic help (maid/driver), holidays abroad, dining-out habits, laptop/desktop ownership, air-conditioner, car, television, microwave/washing machines and the number of family members with internet connection at home and the type of connection used.

Based on these parameters, there are 25 lakh affluent households in India. There is a need to impose wealth tax on all assets, exempting only consumer durables (including one house), with a reasonable threshold for taxation to help the middle classes. The revenue from this source is paltry, as of now.


Dividend and Capital Gains Taxes: There are two areas that can be explored for raising revenues. They relate to levying taxes on dividends and long-term capital gains on shares that are exempt now. A general exemption limit could be fixed, keeping in mind the interest of the middle-class investors, and the need to cultivate the equity cult among them.

Tax can be imposed on long-term capital gains in the context of the proposed amendments to the Double Taxation Avoidance Agreement (DTAA) with Mauritius. There are reported to be around 20 million retail investors in the share market in the country, most of whom are in the middle and upper-income range.

The Congress may lose the votes of the super-rich, but they are a few, and don't make a difference to the outcome of any election. In any case, they do not go the election booth as it is infra dig for them to stand in a queue.


The Finance Minister has expressed his anguish regarding the growing fiscal deficit. There is no likelihood of any reduction in expenditure, especially on subsidies. The only alternative is to raise revenue, and that can be done by following the measures outlined previously.

Also, there is a need to link deficit, not to GDP, but to revenue receipts. The final GDP figures are known with a considerable time lag, and are not good for quarterly monitoring of deficit.

If, however, it is prescribed as a percentage of revenue receipts, it will be effective as a benchmark for follow-up, and also provide an incentive to raise them.

FRBMA: The Fiscal Responsibility and Budget Management Act has not helped much in preventing the monetisation of fiscal deficit. RBI's actions in the buying of oil bonds from the petroleum marketing companies against payment in dollars, the transfer of outstanding balances in the sequestered accounts of Market Stabilisation Fund to the cash account of the government, and the conduct of the so-called open market operations with a fiscal goal to help the market subscribe to new securities were violations of the Act in spirit.

The Government may consider reverting to the old practice of placing its new securities with the central bank for unloading on the market at favourable times. It can be done, as the Act is not justiciable.

(The author is a Mumbai-based economic consultant.)

(This article was published on February 24, 2012)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.