Can FM fix the fisc deficit with super rich, dividend tax?

India's widening fiscal deficit has been giving sleepless nights to finance ministry. In the Budget 2013, the finance minister P Chidambaram is first expected to address this issue of correcting balancesheet. In the third part of a series on Fixing the Fiscal, Latha Venkatesh discusses several key possible proposals such as super rich tax and dividend tax.

She has three of the sharpest minds from corporate India, Koushik Chatterjee, Group CFO of Tata Steel, Shankar Raman, CFO of Larsen and Toubro (L&T) and Pawan Goenka, President - Auto, Mahindra & Mahindra (M&M).  Below is the verbatim transcript of the discussion Q: Let me put the problem very simply to you, Mr. Chidambaram's balance sheet and P&L is not as strong as your companies. He is in a position where he has to tighten his belt. So at least in this particular Budget all of you cannot say give. You have to perhaps allow him to take something. The very least you can expect in terms of positive is that he doesn't take from corporate and individuals. However given this overall responsibility that he has to fix the fiscal, let's kick off. If the Finance Minister (FM) were to ask the rich to give up something that is the easiest way to raise revenues. Suppose he were to have a 40 percent tax slab, levying 40 percent on those who earn say Rs 25-50 lakh, will that make a seminal difference to India's growth story?
Goenka: I don't think that it will have an effect on auto per se. The super rich tax has been talked about quite a bit but if you look at revenue impact it might have, though I have not done my numbers but I doubt it is going to generate lot of revenue. However if it gives a positive feel that yes everybody is feeling the pinch or contributing to the requirement of cutting the deficit that is fine. I don't see a problem with that. However if it is just seen as a revenue raising mechanism and there is a hope that despite doing that somehow will fix the economy, I don't think that will happen.
The only concern that I have in doing so is the concern of the so called shadow economy. Right now India has improved its tax compliance very well over the last decade or so and one of the reasons that's happening because the top marginal tax rate is quite reasonable. If we increase that I just hope that is kept in mind and it don't go to a limit where once again there will be temptation to evade taxes. Q: What if dividend distribution tax was supplemented with a dividend tax? This was tried by a previous government and if I remember right the FM lost his job but it may not have been because of this. Nevertheless dividend distribution tax is 15 percent but we know that the biggest promoters like Mr. Premji who has admitted that the wealthy have to pay more, they earn really not a salary income but a dividend income. So do you think say above Rs 10,000 dividend it is not the corporate but the individual who has to pay?
Chatterjee: See it is not a bad idea considering the conditions we are operating in today. There is an arbitrage very clearly but it also is a premium on the risk taking that the entrepreneurs do. So we need to balance this out in the spirit of contributing to fixing the fiscal deficit. It would be worthwhile for us to seriously consider that as an option.
Obviously the company after paying its whole full quota of taxes is having a distribution tax on top so given that people pays 30 percent as average tax today; there is scope of at least 10 percent on top of this. However statically speaking we are still a country which has 3 percent of the population filing returns. And if you see people who are filing returns over Rs 20 lakh per annum, they are just four lakh assesses and it is a very small percentage. So while it might sound a bit cliched, there is lot that is not being covered today. So we cannot actually kill the goose which lays golden eggs. We have to broad base the tax structure and empirically whenever we have slash taxes and they expanded the base, we have collected more and statistics will prove that. So we cannot overdo the taxing the super rich but we need to kick in efforts to broad width tax as well.