Budget 2013: More taxes for rich means more black money

In line with recent western thinking on taxing the super-rich, India too seems to have joined the bandwagon in supporting such measures, as evident from the debate over whether India needs a fourth income tax slab above 30 percent.

"When taxes rise on anybody, it’ll cut the spending or demand; but taxes on the wealthy people will not reduce demand so it’s a good thing for the economy," Ravi Batra, a professor at the Southern Methodist University in Texas, told Press TV.


However, while the US, Britain, France and Australia have gone ahead and raised taxes on the rich to bring down their deficits, the same policy may not work in India, given  its historical record.

Personal income tax rates  in India were extraordinarily high between the 1950s and 1980s. They had led to high high levels of tax evasion in the first place. With Indira Gandhi's Socialist  phase being ushered in during 1970-71, the top income tax rate climbed to an amazing 93.5 percent, while the bottom rate went up to 11 percent.

It was only after 1974-75 that the retreat from these counter-productive income tax rates  began, following the Wanchoo Direct Taxes Enquiry Committee report of 1971.

It pointed out that when “the marginal rate of taxation is as high as 97.75 percent, the net profit on concealment can be as much as 4,300 percent of the after-tax income…We will not be surprised that placed in such a situation, it would be difficult for a person to resist the temptation to evade taxes.”

Arvind P Datar , in a Business Today article also highlights the foolishness of the idea of taxing those more who earn Rs 15  lakh  a year.  Citing the high  tax regime in India when income tax rates soared to 97.75 percent in 1973-74, Datar argues that the result was not more tax adherence but rather massive tax evasion which resulted in black money transactions dominating our country.

"Taxing the super-rich will drive income underground. There is greater incentive to buy goods and services without accounting for it. Indeed, savage rates of indirect taxes, levied again and again on the same transaction, have led to the practice of not reporting sales and purchases of goods and services," he says.

The government's tax collections— by  moderating the tax structure and entrusting more trust in the taxpayer — after 1997-98 have been much higher than what it was during the high-tax regime.

"The Indian economy has grown when tax rates were lowered. Tax compliance too improved," economist Surjit Bhalla was quoted as saying by The Economic Times.

Third, as former finance minister and parliamentary standing committee on finance chairman Yashwant Sinha has pointed out, taxing the rich more will only hurt the salaried class rather the self-employed who can easily hide their wealth.

“If the super rich are considered to be those with Rs 10 lakh of taxable income in a year then you are reaching out to the upper crust of the middle class and not really reaching out to the HNIs (high networth individuals). If you increase the tax rate then even these will start going out and evade taxes,” Sinha told The Indian Express

Critics of a new tax have also said it would chase away capital and jobs.

The rich in India anyway account for as much as 63 percent of the total revenue the government collects from personal income tax. By taxing them more, the government will sour the negative mood further, which will result in more outflow of money into Swiss accounts.

An Economic Times article last  week pointed out that a higher tax regime will surely lead to a flight of  legitimate wealth to near abroad nations of Singapore and Dubai, where tax rates are relatively low.

Already the year 2011 and 2012 saw little investment from India Inc in India with many contemplating investments abroad.

As Firstpost pointed out earlier, the only way the government can mop up more tax revenue is by cracking down on tax evaders and bring them in the tax net."Putting various databases of people holding assets and people paying taxes should yield clues on whom to tax," we noted.

Another way of  improving the tax administration is by revisting India's double taxation avoidance agreements with countries like Mauritius which allow investments to come in without getting taxed in India. But that comes with a caveat.

"FDI and FIIs come in to India to make use of beneficial tax formations. I would not want to advocate the case of tax on super-rich. However, anybody will be tempted to ask, if you increase the tax from 30 to 35 percent would investors run away? asks corporate lawyer HP Ranina in an interview with CNBC-TV18




Updated Date: Feb 27, 2013 14:00 PM

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