Budget 2013-14: Lure investment with competitive not higher taxes: Experts

The government can tackle the burgeoning fiscal deficit in two ways - one, by raising revenues and two, by cutting expenses. This episode of Budget: Fixing the Fisc on CNBC-TV18, looks at how the government can improve revenues.

Indians pay much lower taxes than Americans, the English or Europeans and pay lower than compared to the Brazilians, the Chinese and the Chileans. Most Europe has a tax-to-gross domestic product (GDP) ratio of 30-50 percent, the US has a tax-to-GDP ratio of 25 percent and Greece has a tax-to-GDP ratio of 31 percent. In comparison, India's tax-to-GDP ratio counting central and state taxes is around 18 percent at best. So, the government certainly needs to introduce more equity into the tax system considering the highest tax slabs. .
A panel of experts comprising Sudhir Kapadia, national leader, Ernst & Young, Dinesh Kanabar, deputy CEO, KPMG and tax administration expert Anupam Kulshreshtha, director, National Institute of Financial Management (NIFM) and former deputy Comptroller and Auditor General in charge of revenues offer their perspectives on how the Union finance minister should go about collecting more money. Below is an editeed transcript of the show on CNBC-TV18 Q: Should we tax the super-rich? Kanabar: The highest rate of tax at 30 percent is way below tax rates worldwide. But at one point of time in India the tax rates were as high as 85 percent which were brought down because allowing generation of wealth has its own benefit to the economy. Q: But was moderation taken too far? Kanabar: It depends on the comparison. Apart from the traditional benchmarks of Europe and the USA, another benchmark could be the tax rates in the ASEAN (Association of Southeast Asian Nations) region and China which are competitive. I think that's more important than mulling if the moderation in taxes was taken too far. Q: Should the government start taxing dividend income above Rs 1 crore? Kapadia: We should understand the context of what is meant by a high rate of tax. What has certainly not worked in this country is very high rates. If the government starts to tax earned income at very high rates as it did in the past, it will only create a process of brain-drain which continues to impact the country till date. When it comes to taxing unearned income, the challenge of extremely low levels, at 5 percent, of penetration of equity investments emerges.
So the government needs to strike a balance between setting tax rates that will garner adequate revenue and at the same time be competitive enough to induce investment into equities instead of gold or real estate.