A flat income tax rate, a tax on dividend incomes and wealth tax on financial assets, are steps worth considering.

As the day for the presentation of the Budget nears, there is a flurry of suggestions to the Finance Minister from many sources on tackling the issues facing the nation.

There is so much emphasis on economic reforms as the sine qua non for any progress. But there is no talk about the administrative reforms to make them successful.

The economic reforms will be carried out by the very same machinery, using the very same procedure that has been the bane of our administration over the decades.

Several committees and commissions have gone into the question of changes in government procedures. But there has been no progress in developing a responsible administration responsive to the needs of the people and the economy.

We are still riddled with approvals of myriad types before a project takes off. Then follow the bottlenecks in implementation. It is indeed a miracle that despite the dampeners, the nation has made so much progress.

In a meeting in Mumbai held a few years ago, a foreign expert with experience in many developing countries said that, although South Korea had as many rules and regulations for foreign investment as India, once an entrepreneur made an application he was told of the decision within a fortnight!

It is expeditious administrative action that has helped South Korea reach the forefront of emerging nations. One hopes the Finance Minister will devote some time in his Budget speech to the crucial aspects of administrative reforms and how he proposes to proceed on them to realise the targets under the Plan.

Although most Budget proposals are likely to have taken shape by this time, it may not be too late to consider a few more suggestions. A new-look Finance Ministry with changes since last year at the level of the Minister and the civil servants, may be more responsive than its predecessors.

IMPOSE FLAT TAX

There is an urgency about paring the fiscal deficit, that can be achieved by raising revenue or spending less. The scope for expenditure cuts is limited, where the problem is one of getting value for money spent. The only alternative is to raise the level of resource mobilisation. The forthcoming Budget needs to be an election-year one.

A new tax regime is expected to be introduced keeping in view the Direct Taxes Code. This is the appropriate time to reconsider the question of a flat tax — an income tax with one rate. (“It’s time to levy a flat tax”, Business Line, February 12, 2008). The minimum taxable limit may be fixed, say, at an income of Rs 5 lakh and all deductions and exemptions, may be eliminated.

It will be attractive to large sections of the population that have seen life-time savings eroded, thanks to the relentless inflationary forces. Because of their low incomes and savings, many taxpayers in the lower rungs of the ladder cannot avail of exemptions and deductions. The tax rate may be fixed at a level that is revenue-neutral, any future increase in collections coming from economic growth.

A flat tax already prevails in about 20 countries, including Russia, where it is reported to have resulted in a significant growth in tax revenues. It will make the tax structure simple and encourage people to file returns. Tax assessment and refunds will be quicker.

The Income-Tax Department would need to look into only the correct reporting of incomes by a smaller number of assesses and not the admissibility of any deduction or exemption, which often leads to time-consuming and costly litigation.

It is time the government realises that savings depend on income, not on interest. Yield or returns determine only the channels of investment, once savings are made. Fiscal incentives by way of deductions and exemptions distort the flow of investments.

WEALTH AND DIVIDEND TAX

The rate of wealth tax is now a uniform 1 per cent beyond the taxable net wealth of Rs 30 lakh. It is the same for individuals, HUFs and companies. It is payable only on the so-called “non-productive assets”, like motor cars, farmhouses, vacant land, jewellery, etc.

A taxpayer may own unlimited value of shares, bank deposits, units, commercial property, industrial property, and so on, without paying any wealth tax. As a result, the revenue from this source is paltry, around Rs 1,000 crore. The exemptions were conceived at a time when most assets of the people were in physical form and there was a need to promote financial savings. It is no longer so. There is a case for including financial assets under the ambit of wealth tax.

According to Forbes, the collective wealth of India’s 100 richest rose 3.7 per cent to $250 billion in 2012.

There is, at present, no tax on dividends in the hands of the individual. Millionaires, especially the promoters of firms, earn fabulous incomes by way of dividends. It is unconscionable that such incomes should be tax-free in a country where about 250 million people live below the poverty line. Instead of the entire dividend income being tax-free, there could be an exemption limit appropriately fixed, so that middle class investors are not adversely affected.

There are reported to be around 20 million retail investors in shares and mutual funds, most of whom are in the middle-income range. Let us keep in mind the diminishing marginal utility of money for the rich.

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

(This article was published on February 13, 2013)
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