Sure, tax the rich but who’re they?

Warren Buffett set the “cat amongst the pigeons”, proposing a higher rate of tax for the rich in the US, to boost revenues for the debt-ridden government.

The Obama administration lapped it up.

True to the perception that “when the US sneezes, India catches cold” the mandarins of North Block and some of our industrialists and economists have stirred up a debate on the need to tax rich Indians.

DEFINE THE RICH

It is indeed a laudable suggestion built on the edifice of equality and fairness — in a society with a wide gulf between the haves and have-nots. However, the key issue that no one has addressed is the definition of ‘rich’ in India.

The Income Tax Act has a glossary of definitions, including, but not limited to, words such as “relatives”, “person”, but for some inexplicable reasons “rich” is not defined. Sure, Wealth Tax has limits beyond which individual wealth is taxed and that perhaps is the closest we get to identify the “rich”. However, Wealth Tax is an insignificant portion of the total tax collections in this country, and hence it has not served any purpose in taxing the wealthy.

It is common knowledge that only about 32 million people pay taxes in a country of 1,260 million. Further analysis shows that 63 per cent of the tax revenue is contributed by those who pay taxes of more than Rs 10 lakh and this population is less than 1 per cent of the total tax payers in the country. Are we therefore targeting this sub-1 per cent population to increase revenues and punish them with further taxes, over and above their current significant contributions?

Unfortunately, the Union Budget has once again taken the same path — by imposing a 10 per cent surcharge on people whose taxable income is Rs 1 crore and above. But how many people in India really belong to this category? The official number is 42,800! So by asking them 10 per cent more, how much revenue are we generating? On the contrary, the real number of people who earn in excess of Rs 1 crore in this country could be 10 times more than the official number, if we take the sale of luxury cars or smart homes into consideration.

Is there way to widen the tax base, by defining the “rich” and addressing the current challenge of low tax revenues? There are not one, but several options.

AFFLUENT FARMERS

Our farmers are poor and we often hear of the misery they undergo at the hands of middlemen and landlords. Every political party is a champion of their cause and vows to fight for their betterment.

We have seen loan melas year after year. However, a farmer with hundreds of acres of land, earning millions through agriculture produce, does not pay a single rupee as tax.

Don’t we need some clarity in our understanding of the word “rich” if we are to tax them? Rural India’s affluence and purchasing power is driving the consumption story and growth of multinational companies in India. Yet, we are oblivious of the fact that this population is not taxed, what with the word “farmers” being synonymous with “poor”.

A perquisite such as club membership or an interest-free loan to an employee becomes taxable, irrespective of the amount. However, the palatial bungalows of the bureaucracy and the political class, the free travel they enjoy are all outside the definition of perquisite for tax purposes. There is an urgent need to define ‘rich’ which can lay these anomalies to rest.

SALARIED SCAPEGOATS

The paradox of how much tax a salaried individual pays vis-à-vis some of our industrialists is also worth considering. A salaried class Indian starts paying taxes at an earning of over Rs 2 lakh, while someone earning in crores pays nothing in taxes, as dividend income is tax exempt. Where is the principle of equity and natural justice here?

In a nation where billionaires are increasing in tandem with our population, wealth tax hardly contributes to the exchequer. Gift tax has been merrily used by the wealthy to legitimately transfer wealth and earnings to extended family to avoid taxes. A multitude of deductions and exemptions provided in the IT Act enable business houses to pay zero or marginal taxes, despite hefty profits, even in the regime of MAT. The salaried class has become the scapegoat for increased taxes, as their taxes are deducted at source.

DIVIDEND INCOME

Indian stock markets are soaring and the price-to-earnings ratio is over 17. Transactions run into several thousand crore every day and government encourages the participation of the aam aadmi by charging an insignificant amount of transaction tax and a notional 15 per cent income tax for capital gains made within one year. Gains made over more than one year are fully exempt to facilitate the culture of investment in equity.

A good move but how do you differentiate the rich from the poor, to tax the former? It is common belief that money makes money and those who can invest and stay invested in this market can reap rich returns and pay no taxes.

Well, that is the way our tax structure works and for a change we do not ape the West here but create our own laws to suit a select few.

POLITICAL CLASS

Finally, as per recent data reported in newspapers, more than 60 per cent of the members of Parliament have assets more than Rs 1 crore (in historical cost and not on replacement value, which would be many times more, especially on land and buildings).

They get allowances and benefits, most of which, if not all, is non-taxable. Are they not rich people who can be taxed?

Unless we know who is “rich”, deciding to tax them is like groping in the dark. India needs to increase its tax revenues and the rich should and can pay the additional taxes.

But let us ensure that there is equity and fairness in the principles of taxation.

(The author is President & Managing Director, TE Connectivity India. Views are personal.)

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