FM's poser: Paying Tax = Civilised; Tax Breaks = Uncivilised?

Finance Minister Palaniappan Chidambaram is always good for unusual quotes or observations.

On Monday, he said: “Paying taxes is a mark of civilisation. I don’t know why people who make less money pay more tax and those who make more money pay less tax.” Or so Business Standard quoted him as saying.

He said this at a meeting he had with income tax commissioners in Delhi, and one of the things he mentioned was that they needed to raise more taxes from companies that paid less than the average corporate tax rate of 30 percent.

The average effective tax rate on corporations, though, is more like 24 percent, and Chidambaram believes that if this average can be raised to 26 percent, he can raise Rs 30,000 crore.

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[caption id=“attachment_443054” align=“alignleft” width=“380”]  Is it the act of paying less tax the problem, or the legislation that allows it? PTI[/caption]

Good luck to him on that, but it’s the quote one should focus on.

Let’s look closely at the first part first - that taxes are a mark of civilisation. If this is so, middle class salary earners must be India’s most civilised taxpayers since their taxes are chopped off at source with little scope for evasion. The rest are uncivilised to varying degrees, by the finance minister’s definition - from the rural rich farmer, who is not taxed at all, to the poor, who anyway can’t pay taxes, to the corporations and the super-rich who use expensive lawyers to cut their tax bills.

Our parliamentarians, who gifted themselves hefty increases in salaries and allowances last year, must be even less civilised because important allowances - Rs 40,000 per month for office allowance, and a similar amount for constituency allowance - is completely free of tax. Out of total earnings of Rs 1.3 lakh a month (salary Rs 50k, and allowances of Rs 80k), the bulk is not taxable. So much for taxes being a “mark of civilisation,” unless Chidambaram agrees with Team Anna that our MPs are “murderers, rapists, etc”.

But there’s another issue to consider. Is it the act of paying less tax the problem, or the legislation that allows it?

If rich agriculturists are paying no tax, MPs almost nothing, and companies far below their stipulated brackets, how are they uncivilised if the law itself allows this?

After all, it is the Income Tax Act, which all finance ministers amend at will in the budget every year, that allows citizens to remain “uncivilised.” By implication, one should say that it is the Income Tax Act, and the ministers who pilot them, who should be blamed for this yearly attack on the foundations of civilisation.

And Chidambaram surely is being coy when he says in the second part of his observation that, “I don’t know why people who make less money pay more tax and those who make more money pay less tax.”

Does he really not know why the answer? It’s because of loopholes introduced by finance ministers, including Chidambaram himself.

If one were to look at the Receipts Budget of 2012-13, of the Rs 79,173 crore shown as taxes forgone in the previous year by corporate taxpayers, the biggest bulk are accounted for by accelerated depreciation (Rs 36,468 crore in 2011-12), deduction of export profits for units in SEZs (Rs 8,153 crore), and deduction of profits for power companies (Rs 8,316 crore).

The point is this: all these deductions were given to companies to promote important objectives like boosting exports and increasing investments in plant and machinery and power generation. Every deduction, when it is not made specifically to benefit crony capitalists, has broader industrial and job promotion goals as the reason for its existence.

It is to recoup these losses that the government has also legislated a minimum alternate tax of 18.5 percent for those who have lots of tax breaks.

So how can Chidambaram claim he doesn’t know why companies pay only 24 percent tax on an average? It is because these tax breaks are legislated by him and his predecessors - for good reasons and bad.

Almost exactly a year ago, Chidambaram made similar noises . Speaking at a Delhi event on, he said: “We must raise the tax revenue to defend (the expected aggregate decline of resources). I know many people won’t like this. But I think, I can summon the courage to make the statement… you must be prepared to pay higher tax rates, especially the rich must be prepared to pay higher tax.”

Here, of course, we are talking about the super-rich, and not corporations.

But is even this something Chidambaram himself has not legislated?

The rich pay less tax because their incomes come more from capital gains and dividends - both received tax breaks in spades from Chidambaram. Long-terms capital gains on securities carry zero tax, short-term gains invite just 15 percent; the dividend distribution tax rate is just 15 percent (a bit more, if surcharge and cess are added), when the top tax rate for the rich is 30 percent plus surcharge and cess.

This is why salary earners at the top bracket pay nearly 30 percent tax, and a Mr Birla or a Mr Jhunjhunwala may be paying more like 20 percent.

And even as we write this, the Parthasarathi Shome panel is talking about abolishing capital gains tax altogether - an idea Chidambaram is warming up to in order to attract more foreign investment. And GAAR - the General Anti Avoidance Rules - is likely to be postposed for three years. In other words, avoiding tax is going to be treated with kid gloves now.

So, Mr C, if we set aside the aspect of stolen money or completely concealed income, the rich pay less tax because you have allowed them to through legal means.

Maybe, you should revisit your statement. You could say: “Enabling the rich to pay less tax is not a mark of civilisation. I now know why people who make less money pay more tax and those who make more money pay less tax.”