Budget 2013: Budget to simplify tax code, widen net & boost GDP: Ranade

Ajit Ranade, chief economist, Aditya Birla Group, in his analysis of the tax structure in India on CNBC-TV18, explains that the government in Budget-2013 needs to simplify the tax code, bring in more number of people under the tax net and boost growth and investment.

Also Read: Govt mulls new taxes in Budget to boost revenue: Sources Below is an edited transcript of the analysis on CNBC-TV18 Q: The country has a progressive income tax regime but it does not reflect changing income structures. Is there a need for a new income tax slab above a particular threshold in this Budget?
A: The principle of taxation requires that the tax system be equitable in the following sense- it should assure horizontal and vertical equity. Horizontal equity means that two people earning similar incomes should be paying a similar proportion of taxes. Vertical equity means that a rich person should pay higher taxes than a poor person. Also Read: Widening of taxes, enactment of GST Bill likely: KPMG
According to horizontal equity parameters, income purely from dividends is tax free while income from salary, interest income or other sources then it is taxable. So, to some extent our tax system does not have perfect horizontal equity. So, there is some room for correction there.
On vertical equity, we know that rich people pay more taxes than poor people, but the tax rate may not be the same. We do have a progressive tax system but it is possible that the effective tax rate of somebody in a much higher income-tax bracket may actually be lower than somebody in the slightly lower bracket. So, there is some room to correct that.
I would say in terms of vertical taxation, the inequity perhaps may be somewhat less than imagined, but on the horizontal equity perhaps there is some room for improvement such as including more people in the tax net and ensuring all income is taxed. Q: Given the changing socio-economic dynamics, the unrest, inequality is emerging as one of the key obstacles to growth even from a corporate standpoint. Do you think a moderate inheritance tax for instance is a good idea in the upcoming Budget?
A: Yes, that is what I maintain. I am just trying to again separate two concepts- the larger social issue of widening income and wealth inequality. For that we need a medium- to long-term strategy of trying to reduce these income disparities in society. But in the Budget next year, we have to be almost exclusively focused on ensuring that we encourage private investment and growth.
So, it is possible to combine fiscal consolidation with achievement of growth. The Kelkar taskforce recommendations suggest lower rates of tax, fewer exemptions and a much wider tax net. The government should make the tax code simpler and have a much wider tax net. About 60 percent of GDP comes from services sector though it doesn’t provide 60 percent of the tax revenue. The agricultural sector and allied services like agro processing and could also be brought under the tax net.