People's Democracy

A Glance at the Tax Proposals

                          Moinul Hassan

THE Direct Taxes Code (DTC) bill comes in the backdrop of a decline in the tax-GDP ratio in the recent years. The direct taxes to GDP ratio has also declined from its peak of 5.9 per cent in 2007-08 to 5.4 per cent, as per the budget estimate for 2010-11. This amounts to a weakening of the resource mobilisation effort and will constrain the development expenditure. Reversing this regressive trend should therefore be an important objective of the DTC.  

Tax Revenue as a Percentage of GDP

             Source: Economic Survey, 2010-11, Chapter 3, Table 3.3

In this backdrop, every conscientious citizen of the country would agree on the principle that the “character of the tax regime should change and it should be made more progressive.”

The fact that there are only 2.8 crore income tax payers in a country of over 120 crore people, indicates how narrow our tax base is. A part of the reason is that a large number of the rich persons, especially the rural rich, continue to be outside the tax net. The issue of widening the tax base is relevant as far as bringing the higher income earners into the tax net is concerned. It needs to be added that high income earners need to be taxed at higher rates as well.

The slabs proposed in the DTC Bill will, however, not only shrink the income tax base but will also lead to revenue losses. There is no justification for lowering the current income tax rates across the board for those earning over Rs 5 lakh per annum (over Rs. 41500 per month). The following slabs are being proposed as an alternative:

The linking of adjustment of tax slabs with inflation should be restricted to the lowest slab, i.e. Rs 0-3 lakh only. For the higher income brackets, tax rates should not be revised periodically.

At present the annual wealth tax collection is only to the tune of Rs 500-600 crore, which is very meagre, given the skyrocketing wealth of the super-rich in India. The number of dollar billionaires in India, as per the Forbes list, has gone up from 13 in 2003 to 55 in 2011. The combined net worth of these 55 dollar billionaires stood at over 240 billion dollars in March 2011. The richest person in India, who appears in the top echelons of the Forbes list, has constructed a 27-floor personal home in Mumbai, with an estimated cost of 2 billion dollars. Such conspicuous consumption is taking place mainly because the wealth tax rate in India is too low. This needs to be enhanced to mop up more revenues from the super-rich. The alternative proposal for wealth tax slabs can be something like the following:

Wealth tax should be modified. There is no need for exemption of religious trusts from wealth tax. The religious trusts who qualify for wealth tax, i.e. those having assets over Rs 5 crore, should be made to pay wealth tax.

There must be a switch over in case of corporate taxes profit based incentives to investment based ones. What needs to be added is that all incentives, either sector specific or area based, should have a time limit of not more than 2 to 3 years. No tax concession should be allowed beyond 3 years. The SEZ Act should also be amended to phase out all the profit based incentives, which have been allowed for 10 years.

The big corporates and MNCs are using the tax avoidance treaties, like India’s Double Tax Avoidance Agreement (DTAA) with Mauritius, to indulge in ‘treaty shopping.’ It is noteworthy that over 40 per cent of FDI inflows into India are routed through Mauritius, which only points to tax avoidances and not “bona fide transactions.” As it is, all the scams in the recent period, like the 2G scam, IPL scam, Jagan Reddy scam in Andhra Pradesh etc, have a Mauritius connection. This is leading to huge revenue losses. The recommendation of laying GAAR guidelines in parliament is a welcome initiative. The tax authorities must be empowered to apply GAAR provisions and the onus of proving that a company is not avoiding taxes should lie on the concerned company itself, in a strict manner.

The provision regarding the transfer of “small shareholdings and transfer of listed shares outside India” by non-residents is vague. “Small” has to be defined in more concrete terms.

As for raising the quantum of permissible deduction towards repair and maintenance of property to a more “reasonable” percentage, the provision is vague. “Reasonable” has not been defined, which it needs to be done in a proper way.

Capital gains tax on listed securities, if held for more than a year, is nil. The long term capital gains tax on securities should be restored and the rate should be equivalent to capital gains made on other asset classes. Experience shows that such incentives are often misused and lead to an unhealthy competition between the states and districts, which should be discouraged. All tax incentives should have a sunset clause of 2 to 3 years. There is an urgent need of restoration of status quo as far as taxing capital gains and asset transfers made by NPOs (non-profit organisations) in the name of tax simplification is concerned. The NPOs should be made to pay taxes on capital gains.

A majority of the people in this country are facing the brunt of the policies the UPA government is pursuing. Sagas of corruption and massive price rises have added on to the burns of the “aam admi,” and have been adding to the ranks of the ‘suffering’ India. Only a political will and commitment towards the suffering millions can ensure the imposition of taxes on those of the ‘shining’ India. That is precisely the need of the hour. The government must make its response in a befitting manner.