At the height of her socialistic zeal, Indira Gandhi, the former prime minister, slapped the maximum marginal rate of 97 percent income tax on the super rich. The rich countered it by saying we would rather not earn. While usury rates of income tax be they on individuals or companies result in dampening the economy with the urge to earn getting depressed, there is something to be said in favor of Robinhood taxation — taxing the rich to subsidise the poor.
In our country, it would go down well as suit-boot taxation. What we have on the contrary at present is a regressive regime —close to 50 percent tax on petroleum products results in the poor paying tax through their noses and subsidising the rich! The interim budget 2019 to be presented on 1 February 2019 by Finance Minister Arun Jaitley can correct this skew with some path-breaking reforms that might appear to be just reversal of the past policies.
The following measures can be taken forthwith:
First, the regime of surcharge on individuals with income in excess of Rs 50 lakh must be changed with a fresh slab rate of 40 percent given the fact that such a drastic hike is but going to pinch the pockets of a minuscule, well-heeled section of the society. At present, the surcharge of 10 percent on income between Rs 50 lakh and Rs 1 crore practically translates into a 33 percent maximum marginal rate of tax and 15 percent on income in excess of Rs 1 crore into a 34.5 percent maximum marginal rate of tax.
Secondly, there is no earthly reason why the principle that any income must be taxed in the hands of its actual beneficiary should not be applicable to dividend. P Chidambaram, the former finance minister, thought otherwise, and in 1996 he ushered in dividend distribution tax (DDT) which has stayed on except for a brief show of defiance by the National Democratic Alliance (NDA) I finance minister Yashwant Sinha, who brought back the classical system of taxing dividend in the hands of the shareholders.
Today, a company pays DDT of 15 percent plus on dividend and the shareholders are completely exempt from tax except that they have to pay a 10% tax on dividend if it exceeds Rs 10 lakh in aggregate. This is not at all satisfactory.
Rich industrialists get away with 15 percent plus paid by the company on their behalf and 10% plus paid by them directly thus making an aggregate of 25 percent plus whereas had dividend been taxed in their hands, they would have had to cough up 30% plus. Worse, DDT regime hurts the widows and others who are not required to pay tax thanks to its one-size-fits-all approach.
Long-term capital gains (LTCG) from the bourses had been enjoying complete immunity from income tax. Last year, Arun Jaitley made bold to tax it at a flat rate of 10 percent if it exceeds Rs 1 lakh per financial year. The rate should be doubled to 20% in the interest of horizontal equity — the de rigueur or default rate of tax on all other items of LTCG is after all 20 percent.
Thirdly, wealth tax should be restored. Jaitely did the mistake in 2015 on the facile ground that it wasn’t begetting any sizeable revenue to the exchequer and on the contrary the cost of administering the regime outstripped the revenues therefrom. How could there be sizeable revenue if the wealth tax, as it was in vogue between 1992 and its abolition in 2015 targeted but just 6 types of assets, leaving shares and bank balances and deposits among others severely alone. There should be a wealth tax of 3 percent on one’s entire net wealth without cherry-picking the moment it crosses the limit of say Rs 2 crore.
Finally, there is no reason why estate duty kept in suspended animation since 1985 should not be revived with greater vigor. Call it estate duty or inheritance tax it makes eminent practical sense. There are states in the US which impound as much as 50 percent of the estate in one form or the other on the ground that idle inheritors must be visited with a heavy hand of the taxman.
Let us begin with a 10 percent tax on all estates of the deceased in excess of Rs 5 crore. Like with wealth tax, let us tax all assets of the deceased without favor.
The government should tax the rich to run its welfare schemes. But Modi government has been guilty of running them with the hefty taxes collected from petroleum products.
(The writer is a senior columnist and tweets @smurlidharan)
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Updated Date: Jan 23, 2019 12:50:22 IST