A set of half-hearted tax proposals

TCA Ramanujam / TCA Sangeetha | Updated on: Jul 07, 2019
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The direct tax steps for individuals and corporates are not satisfactory. A wealth tax could also have been considered

The maiden Budget of Nirmala Sitharaman will certainly please economists and pure fiscal pundits. The ability to pay principle has been carried out in a logical manner. Thomas Piketty, the French economist, had repeatedly faulted India for not taxing its billionaires at sufficiently high rates, amidst rising inequality levels.

Economists have noted that rising concentration of income and wealth has become a concern even in the US. Proposals are being considered in the US to levy a top tax rate at 70 per cent on income above $10 million as against the current highest federal income tax of 37 per cent applicable to income above $500,000,000. Elizabeth Warren proposed a 2 per cent wealth tax on wealth above $50 million as against zero tax at present. Estate duty is levied there at the rate of 40 per cent on wealth above $1 million. The levy of surcharge at 3 per cent and 5 per cent respectively on incomes above ₹2 crore and ₹5 crore will raise the tax rate on these categories by 3 per cent and 7 per cent respectively. This is a welcome measure and should be applauded.

Why is the government fond of levying cess or surcharge instead of raising the tax rate? The answer is obvious. These levies are absorbed by the Union Government and not shared with the States.

Corporate tax rates

There is a 5-year promise by the Modi government to reduce corporate tax rates to 25 per cent uniformly. In the latest Budget announcement, the Finance Minster reduced it to 25 per cent for all companies with turnover below ₹400 crore. Still this leaves out some companies and they contribute the lion’s share of corporate taxes. To that extent, the promise remains unfulfilled.

A more basic question in this regard concerns the tax rate depending on the form of the business organisation. A company gets the benefit of 25 per cent taxation. There are other entities in business like firms, AOPs, BOIs, HUFs etc. They will suffer tax at 30 per cent along with surcharge and cess. So where is the fiscal neutrality?

The Finance Minister has successfully tackled the problem of ‘Angel taxation’ making it imperative for the Income Tax Department to accept the valuation furnished by start-up companies.

In the realm of personal taxation the Finance Minister has chosen to retain the structure as proposed in the Interim Budget. The salaried class will be disappointed. An attempt made to discriminate between salaried and non salaried classes in the matter of direct taxation elicited a cold and harsh response from the Finance Ministry.

The tax GDP ratio has declined due to lower GST mop up.

The government has not considered it fit to bring back Estate Duty and Wealth tax. If the present government cannot do it, who else will ever? These levies are still operational in the US.

Foreign investment

The Finance Minister has referred to the falling FDI and FPI and has announced measures to increase them. It has been pointed out that high tax and interest rates make investing in India a costly proposition.

For the first time the Union Budget devotes time and space to the burning problem of the day namely water crisis. The scheme of ‘Har Ghar Jal’ is attractive to contemplate. It is not known how the ambition will be achieved.

The current joke in this regard is that wealth is measured not by bank balances but the water storage in the sumps.

The promise of 100 per cent electrification for all households is also an attractive one.

The levy of duty on petrol could have been avoided. While welcoming foreign students into our universities, the Finance Minister has also thought it fit to levy customs duty on imported books. Are books on par with gold? This is a price on knowledge.

The schemes announced for agriculture, the traders in the unorganised sector and urban India all appear ambitious. But the Finance Minister quoted Chanakya: “Karya purusha karena lakshyam sampadyate” , meaning “with determined human efforts, the task will surely be completed.”

Pruning the tax administration is long overdue. The Finance Minister has started in right earnest in this regard. We can wish her Godspeed.

Ramanujam is a former Chief Commissioner of Income-Tax, and Sangeetha is a Chennai-based advocate

Published on July 07, 2019

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