Taxing super rich not real solution: HP Ranina

Has India paid too little attention to the accumulation of wealth in few hands, is the key question on finance minister’s mind. At 17.7% India has one of the lowest tax to gross domestic product (GDP) ratio. It is lower than the developed economies like the United States, the United Kingdom, Germany and France. It is lower than even comparable BRICS countries like Brazil, Russia and South Africa. Even debt-ridden countries like Greece, Italy and Portugal have a better tax to GDP ratio than India.

In an interview to CNBC-TV18, Kavita Rao, Professor (Public finance) NIPFP, Anupam Kulshreshatha, director, NIFM and former deputy controller and auditor General and HP Ranina, corporate tax lawyer, former board member of Reserve Bank of India shared their views on whether more taxes should be imposed on super rich in India and will it help the government earn significant revenues. Below is the edited transcript of their interview with CNBC-TV18. Q: Give this requirement of fiscal deficit and our tax to GDP ratio is not as good as many of our peers and our superiors. Should India go in for a tax for the super rich? Rao: I seriously do not believe that we should be looking at specific taxes at so called super rich. The idea is not to say that you have three tax slabs now and you should have a fourth one to deal with very high incomes. But, there is very good reason to believe that we should look at similar taxation of all income category. If wage incomes are taxed at 10-20-30 percent slabs there is no reason why dividend income should get preferential treatment or for that matter capital gains should be exempt on shares or on variety of other instruments so that the beneficiary potentially people with larger higher incomes can get to pay taxes which are way below- what a salaried person pays. One would like to see a balance; we are not necessarily looking for 40 percent tax on super rich. Q: Since you have seen several decades of taxation in India why was the estate duty abolished. After all we did have it from 1953 to 1985 and whole host of countries whom we like to look up to for public finance issues do have an estate duty or inheritance tax. Why was it abolished in India and was it beneficial, the abolition? Ranina: While it was abolished in India because it did not produced the right result. People started putting their assets in what is called as interlocked companies. By putting all their assets in interlocked companies they avoided having the assets in their own name. So, when a person died there was nothing in his name, which could be liable to estate duty. Estate duty was at the rate of 85 percent on estate of over Rs 20 lakh, but it brought no revenue whatsoever to the government of India. Therefore, when Rajiv Gandhi became the Prime Minister of India, he took the right decision to abolish estate duty and also to make it very clear that this is not something that we want in India because if it is not going to achieve the result, we do not want taxes for the sake of having taxes. The whole objective is to reduce the fiscal deficit to increase the tax gross domestic product (GDP) ratio. If these two objectives were not achieved then there is no point in having a tax regime like estate duty. Q: Where do you ideologically stand on the issue of taxing the 'super' rich in some form or the other if not inheritance tax in some other form? Ranina: I personally agree with Professor Kavita Rao that there is absolutely no reason to have a specific tax on certain individuals. In India we have a very large unaccounted economy, in fact only last week there was a press report which said 40 percent of the GDP of India is unaccounted. We have enough powers under income tax law to tax all this income. The whole problem is we are not able to get at the people who are suppose to pay the taxes. So, instead of taxing 'super' rich the real answer is to tax everybody because it is most inequitable that some people get away with paying nothing though they are in very high income brackets. So, the real solution to this problem is to tax the money which is today unaccounted. Even if we get 10 percent of that our fiscal deficit will come down dramatically. _PAGEBREAK_ Q: There is no argument that taxes should be applied more efficiently. We should have better compliance and effectiveness and tax the super rich. How would that argument cut with you? Ranina: You want to tax the super rich. They have been paying taxes at the rate of 30 percent. Maybe one can tax some amount of income like the dividends and Capital gains can be taxed at a higher rate. However, then government has certain compulsions for not doing this. This is something which one has to do. If one wants to tax the super rich, maybe one can decide what limit to put on the amount. That itself will be debatable. The question is how much revenue one is going to get. This is a study which has to be made. So, before we tax the super rich let us make some study. What revenue we will get if we have 40 percent rate of tax on income over Rs 25 lakh? What revenue is the government going to collect? Q: How much more money will we get if there is a further slab of 40 percent on whatever level you take? Kulshreshtha: Let me quote some figures from Direct Taxes Code (DTC) wherein in 2010 they have said that there are about 3.5 crore assesses in the country of which only 4 lakh are paying tax above 20 percent. However, they paid 63 percent of the total tax in that year which came to about Rs 93,000 crore. Let us say one is going to increase the slab from 30 percent to 40 percent, so, Rs 93,000 crore will become Rs 103,000 crore. That means Rs 10,000 crore is what one is going to get additional from that. Now the point is taxing the rich could be one of the easy options, but a better option will be to make the tax administration much more efficient and effective. The current tax rate that is 10 percent, 20 percent, 30 percent are constant since 1997-98. Before that in 1992-93 there were three rates which were 20-30 and 40 percent. If we go back historically in 1971-72 the rates had gone up to 93.5 percent. There were 11 slabs. In 1974-75 the rate went up to 97.5 percent. If one compares the tax collection after 1997-98, between 1992-93 to 1997-98 and before 1992-93 one will find that the rate of increase in revenue collection from the direct taxes has been much higher after 1997-98. Even the tax-GDP ratio which remained nearly constant before 1992-93 between two to two point five percent has become much better like it was 6.6 percent in 2007-2008. It came down to about six point five percent in the year before last. Even the tax buoyancy which never went up above one before 1992-93 has even gone up to two. In certain years of course it had been negative. The Income Tax Department has been able to improve their tax collections. It is because of two reasons, one moderate tax structure and two placing more trust in the taxpayer. That was by certain acts like doing away with the Summary Assessment Schemes etc. Thus, by taxing the rich more by increasing the tax rate why are we willing to disturb the equilibrium which exists today in this country? Why cannot we go and improve the tax base? Last month the Revenue Secretary was talking in a press conference. He said that today in the current year there are only 14.6 lakh assesses who are filing an income above Rs 10 lakh. If you go to DTC in 2010 this figure was Rs 18 lakh. The point is there are 33 lakh number of persons in the current year who have deposited more than Rs 10 lakh in banks. Rather increasing the tax rate if one increases that number of 4 lakh who are paying Rs 93,000 crore worth of revenue one will surely get Rs 93,000 crore more. To me that is a much easier option. However, that requires improving the tax administration, going for measures where persons who are not paying taxes are brought into the tax link. _PAGEBREAK_ Q: Suppose we were to impose a dividend tax and if were to also to increase the long-term capital gains tax what might that yield you think? Kulshreshatha: Like today it has a flat rate, 15 percent is paid by the company who is distributing the dividends. However, it comes into the hands of individuals who might be paying taxes at 10 percent or 20 percent or 30 percent. Though I have no data but I would presume that most of the dividend probably comes in the hands of individual who are paying tax at the rate of 30 percent. Surely, there is likely to be an increase in tax revenue if dividends are taxed in the hands of persons who are receiving it rather than in the hands of the persons who are giving it. Q: This was your idea -Any calculations you have you think that might be the tax on the super rich would be better be broken into a dividend tax? Rao: I don’t really have numbers. I would think dividend distribution tax in one of the service that PWC had conducted. It was about 10 percent of corporate taxes. Just double it and one gets about 20 percent. It another 10 percent of corporate tax as additional taxes, just by allowing dividends to be taxable in hands of the individuals. Presuming most of the dividends accrue to individuals who are taxable at 30 percent. I would just like to go back to what Kulshreshatha was saying about the need to improve tax administration. I guess it is nobody’s argument that you should be doing either or. Improving tax administration is more like a long-term measure. One can achieve improvements in tax administration. If one wants to deal with issues like unaccounted incomes, one have to deal with administration. However, those are not things which are going to happen overnight. When I said, I would look for ways of bringing dividends taxable in the hands of the tax payer, the idea is more a sense of equity than to say that you will get a whole pot of money that is very easily available. It is a sense of trying to put all tax payers in the country on the same level playing field. For all of that possibly it is also important to go back and revisit DTAs with countries like Mauritius. This allows investments to come in and they do not get taxed in India. So, one has to correct through an STT which then means we should not have capital gain tax. We have a spiral of policy and at the end or at the beginning of it is an assumption. That is, that FDI comes to India or FII comes to India only for us to beneficial tax formations. In the process we also have to set up a mechanism where it is more profitable for you to be a foreign investor in India than to be a domestic investor. Are we encouraging people to do round tripping? It is a question that will always remain as long as we are doing down path. Yes, we would like to see people being taxed. I would not want to advocate the case of tax on super rich. However, anybody will be tempted to ask what happens if you increase the tax from 30 to 35 percent – would people run away. The extreme example of 97 percent taxes hence a lot of evasion and avoidance leaves open the question. As to what is the optimal tax to which you can really push taxation without people bucking out. That I think is an unanswered question for academics as well as for everyone else. _PAGEBREAK_ Q: Would this be the way to go? You expressed your approval of dividend tax, maybe higher capital gains and not giving away exemptions on capital gains as Mr. Shome has recommended. However, more importantly expenditure tax, would that be a way to go, especially on luxury items? Raina: Expenditure tax is already there in the sense that you have to pay tax whether it is called Value Added Tax (VAT), or Goods and Services Tax (GST). that will come in a couple of years. However, I would suggest, not expenditure tax, but determining the income based on expenditure, expenditure based income tax. This is an innovative system which is being followed by many countries. How do you determine the real income? Today people are avoiding income tax by not disclosing their income. The way to collect that income tax is to find out how much they are spending every year and how much they are saving. That is called expenditure based income tax. We already have provisions in the income tax law for the last 30-40 years. Section 68-69, 69A, 69B, 69C which tracks the income based on the expenditure incurred by a taxpayer. That is a way by which people are then made more tax compliant. They know that when they spend the money or save the money they are going to be caught. That will disclose the real quantum of their income. So, I would go in for expenditure based income tax where you determine the tax base having regard to the expenditure which a taxpayer has incurred. Q: Is expenditure tax or expenditure based taxation one way to go? A quick word on how much can we collect by simply improving compliance? What is the quick way to improve compliance and implementation of taxes? Kulshreshatha: I am not pretty sure about the expenditure tax whether it will improve matters or not. However, I am very sure and very confident that if we improve the tax administration certainly the tax revenue will increase. There are two or three very quick points I would like to make. First is about sharing information. Being the tax auditor in the revenue wing of Comptroller and Auditor General (CAG) for many years we have specialised a technique where we pick up some information from sales tax. Then go and check in the income tax and in the central excise. Many of our audit observations results from these. We find that someone has paid income tax on certain things, but has not paid service tax on that. Surely there is a need for sharing information amongst all the tax departments that exist today in the form of these Large Taxpayer Units (LTUs). However, it needs to be made more effective. Second point comes up is making use of the third party information. Whistleblowers apart, but even a lot of third party information is available. Making use of that and then coming up and incrementing what is known as International Financial Reporting Standards (IFRS) the financial reporting standards. Unless we ensure compliance with the accounting standards in the accounting of various individuals, firms and companies, they will hide certain of the profit. Then it will not be possible for the taxmen to really tax all that income. So, it is not a long-term process like Professor Rao was saying. Whereas I agree with most of what she said. However, I think improving tax administration is not a long-term process. It is an immediate process. It has to be a continuous process, because unless we do that we are not going to improve the tax collection. The tax-GDP ratio will remain 6 or wherever it is today. Today we have a tax base of 350 lakh, but then by any given standards there are many studies available on that. Easily seven to eight crore of people in this country should be paying tax. If we are able to capture this kind of base then the tax gap will reduce and the revenue certainly would be much more. It is not possible for me to give an estimate of how much more it will be. That will require some more detailed calculation, but it will be certainly much more.