S Murlidharan

Rich must cough up more taxes

S.MURLIDHARAN | Updated on March 12, 2018

If the US can levy inheritance tax, why not India? — Vipin Chandran

Higher tax incomes can be realised from the super-rich merely by rationalising existing rules.

The Republican candidate Romney, who lost out to the incumbent President Obama in the recent US Presidential elections, has been paying an average tax of 14 per cent on his mind-boggling income, running into millions of dollars, thanks to generous exemptions and tax breaks wangled by the minuscule super-rich for themselves in the US.

Much the same has been happening in India, with industrialists and moneybags managing a tax dispensation that is skewed in their favour.

What the Finance Minister P. Chidambaram needs to do is to rationalise the existing skewed tax structure. If he does this, there may not be any need to increase the tax rate for the super-rich.

In 1996, he abolished tax on dividend on the ground that it was taxed twice over, given that it was paid out of tax-paid income of a company. Concomitantly, he ushered in Dividend Distribution Tax (DDT) on every Indian company paying dividend so that the exchequer got to ride piggyback on shareholders — when a company paid dividend, it paid DDT as well that is reckoned as a percentage of the dividend payout.

This cosy regime for industrialists has been continuing unabated, but for a brief lull under the stewardship of Yashwant Sinha in his first innings.

As a result, top industrialists have been laughing all the way to bank with a soft DDT being just half of the tax they would have had to pay, had tax on dividend been imposed on the recipient, as it indeed should be. DDT targets all shareholders vicariously without discrimination, to the extent that while industrialists get away with a rap on their knuckles, widows, senior citizens and others not obliged to pay tax, willy-nilly end up paying tax on their dividend income.

The repugnant scheme needs to be given a quiet burial. It would not only set the governmental cash registers ringing happily, but also correct the blatant skew in favour of the moneybags.

That reversion back to square one would revive the iniquitous double taxation of dividend is a specious argument, as even under the present regime dividend is taxed twice over in the hands of the company.

The industrialists have also managed to wrest a soft 15 per cent tax on dividend from foreign companies. This too should be wrenched away.

Even more blatantly skewed is the regime of taxation of capital gains from the Indian bourses --- a soft 15 per cent tax on short-term gains and complete waiver for long-term gains. This is a munificence the country can ill-afford, besides being a shockingly misplaced, non-merit subsidy.

Apologists of this regime including the Finance Minister P. Chidambaram whose brainchild it is, aver that the Securities Transactions Tax (STT) more than compensates the exchequer for the loss of revenue, little realising that horizontal equity demands that no income should be shown a special favour. STT being a turnover tax is no substitute for income-tax, and hence both should be imposed.

Windfall tax

Taxing windfalls like lotteries, race horses and contests on television at the maximum marginal rate of 30 per cent is fine. But the list needs to be expanded. There is no reason why gifts should not be viewed as windfalls. As it is, they are taxed at the applicable slab rates.

hey should also be taxed at a flat rate of 30 per cent after removing the unlimited exemptions to marriage gifts and bringing all non-monetary gifts under the tax-fold.

When the US and Netherlands can have a regime of inheritance tax, there is no reason why India should not.

Properties devolving on inheritors are a species of unearned wealth which should be taxed at 30 per cent, the rate reserved for windfalls.

While rent may not be viewed as a windfall, it shouldn’t be mollycoddled either.

The present regime of granting a standard deduction of 30 per cent from the net annual value of the property that is the higher of the market rent and actual rent should yield to a standard deduction of a more reasonable 20 per cent.

Stamp duty authorities, whose valuation is accepted as sacrosanct for imposing capital gains on sale of immovable properties, should be called upon to keep an eye on the rental value of properties as well so that income from house property can be computed more rationally and less subjectively.

Rationalisation, the key

The muted pitch made for a hike in tax rate for the super-rich seems to be unwarranted. The existing tax regime needs to be rationalised, with even-handed taxation of income being the leitmotif.

There is no need to humour the industrialists; instead, it is important to cast the tax net far and wide. The hard-to-tax categories must be brought into the tax net by imaginative use of TDS (tax deduction at source) and presumptive taxation in tandem.

Presumptive tax schemes like the ones for retailers and truckers are languishing for want of suitable interlocking devices. Transport authorities must be roped in to apply the pincer on obdurate truckers.

(The author is a New Delhi-based chartered accountant.)

Published on January 13, 2013

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