Taxing Zenith

Thanks to US president Barak Obama, the new fashion of taxing super-rich has finally come to Indian shores. Prime Minister’s economic adviser C. Rangarajan recently suggested imposing surcharge on income of India’s neo crème de la crème. With an endorsement from the Finance Minister P. Chidambaram the idea of taxing super riches may become a reality in the forthcoming budget. This idea has a stock justification as Indian economy is reeling under the pressure of high fiscal deficit.  Political connotations also appear apt in the given scenario.   But proposal of this taxation seems to be a delicate choice for the finance minister as black economy dimension of higher taxation is no less befitting. Increased taxes on wealthiest elite may fuel the exodus of black money to tax-havens or stimulate them to move in to countries having lower income tax rates.

Current income tax rates are divided into three slabs of 10%, 20% and 30%. Earnings more than 15 lakh are taxed at the highest tax rate.  This range of taxation was last revised more than a decade ago in 1997 when people earning close to fifteen lakh used to be considered among top slot of income holders. Now annual income of a good chunk of Indian population has gone up to 40-50 lacs. Hence it is irrational that people earning 15 lakh and someone who earns just double of that is taxed at the same rate. Pranab Mukherjee in his recent presidential speech accepted the fact that the fruits of liberalization have been increasingly savored by a handful number of people. It didn't trickle down to the scale as was expected. Therefore taxing super rich, at least for the time being, is a concept in chorus with the political thinking of the existing government.

People standing at the peak of income pyramid have reached to the saturation of their consuming power. Their investments are landing at the dead assets like land or gold. While exempting or incentivizing lower income groups in tax rate stimulates general consumption and savings.

This is not all a wild guess that higher taxes may incite people to implicitly flood money towards tax sanctuaries. A latest research from National Institute of Public Finance and Policy (NIPFP), a Govt. think tank,   estimates that India’s current black money economy can be 30% of its Gross Domestic Product (GDP) nearly Rs 28 lakh crore. Income tax base in India is meager and only 5.6 percent taxpayers have a declared income of more than 10 lacs. However, the rate at which luxury cars, pent houses and other extremely expensive and swanky items are being sold in the country is a proof of a gross underreporting of income. Finance ministry has enough data of high value transactions to corroborate this enigma of wealth and rampant tax evasion.

It is historically proven that lower level of tax rates increases tax compliance and higher tax rates result into tax evasion. Therefore higher tax might be temporarily levied on well-heeled population as an instant remedy to the fiscal illness but economy is looking for the long term, stable and transparent tax regime. Widening tax base and strong setup for the prevention of tax evasion is the only panacea for our debilitated tax system.