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Oxfam report shows 1% own 58% of India's wealth; it's time for FM Jaitley to revive direct taxes

An Oxfam report ahead of the annual World Economic Forum meet in Davos bemoans the fact that 1 percent of Indian population has cornered 58 percent of its wealth whereas the global average is 50 percent. Indeed, when it comes to the richer among the rich, Pareto’s law, which says philosophically that 20 percent of people corner 80 percent of wealth, is worsted. The statistics are a feast to the dyed-in-the-wool communists who are bound to quip I-said-so-didn’t-I.

Policymakers in the country need to correct this slant by rethinking some of the direct taxes laws. There isn’t much scope in the indirect taxes laws given the fact that they are inherently regressive and affect the poor more because of its one-size-fits-all approach. Yes, the proposal to subject luxury goods to a GST of 40 percent should be music to the ears of those concerned over the steadily widening gap between the rich and the poor.

Reuters

Reuters

VP Singh the then finance minister way back in 1985 did something incongruous---he abolished estate duty by keeping it in a suspended animation even as he unleashed tax sleuths on industrialists. The maximum marginal rate of estate duty was 85 percent then. It is not the author’s case that we must regress to those levels just as it is not advisable to regress to 97.5 percent maximum marginal income tax rate that was applicable at the height of Indira Gandhi’s garibi hatao hype.

At 97.5 percent, the rich said we would rather not earn! Much the same is the case in the USA where inheritance tax/estate duty is so high in some states that the rich prefer to gift away their properties during their lifetime rather than resigning to the prospect of squirming uncomfortably in their graves after death! Indeed much of the American philanthropy and munificence chiefly on the parts of the legendary Warren Buffet and Bill Gates is tax induced.

Having said that there is a case for revival of estate duty in the country which in the first place should never have been suspended. A modest estate duty is what the doctor has ordered so as to make inheritors pay for the booty they land which indeed is the American rationale for the stiff impost there. At the same time tax on gifts must be rationalised so that the soft regime obtaining for gifts doesn’t tantalise the rich into gifting so as to avoid the clutches of estate duty. Soon after abolishing estate duty we followed suit with gift tax. Gift tax which till then was on the donor was abolished.

It was only in 2007 the then Finance Minister P Chidambaram brought back gift tax not as a separate impost but as a part of income tax----those receiving gifts beyond the prescribed threshold will have to add it to their taxable income. We must go back to square one and tax gift in the hands of the donors if only to bring about parity between the tax treatment of parting with property through two alternatives----gifts and Will.

The incumbent Finance Minister Jaitley must share some of the blame for exacerbating the income and wealth divide---he abolished wealth tax with effect from 1 April 2016. There was actually a case for increasing the wealth tax rate from the soft 1 percent flat to something more substantial but he threw out the entire tax on the ground that it brought in paltry revenues. With so many exemptions and the soft flat rate, revenues were bound to be paltry.

Prime Minister Modi has made no secret of his resentment of pampering of the stock markets. He should prevail upon Jaitley to revive all the three direct taxes---estate duty, wealth tax and gift tax in the hands of donors. And the 10 percent surcharge on income tax if one’s income is more than Rs 1 crore must continue. Dividend must be taxed in the hands of the shareholders.

The present regime of Dividend Distribution Tax (DDT) is regressive as it punishes widows and retired persons among others with no taxable income with vicarious DDT of 18 percent. Industrialists laugh all their way to bank because they get away with a vicarious 18 percent whereas they would have had to cough up 33 percent had the tax been on the recipients.

For full coverage of Union Budget 2017, click here


Updated Date: Jan 18, 2017 12:51 PM

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