Even if you ignore the controversy over whether or not the majority of economists present at the meeting with the finance minister on Monday wanted to levy a surcharge on the rich, the facts suggest little justification for the proposalthough it is undoubtedly true that, since these taxpayers are in the tax net anyway, a surcharge will likely fetch a tidy sum of money. The issue, however, is whether this is justified on grounds of equity and whether larger amounts cant be got from other taxationthat is, whether the move makes sense on grounds of efficiency.
The fact that just 3.2 crore of 124 crore Indians pay personal income taxes, of course, shows just how far we have to go, and how poorly the tax network is growingthe number of direct tax assessees grew just 7.3% between FY07 and FY11 while tax collections grew exponentially due to the unprecedented economic boom, implying the taxman hasnt done anywhere as much as he should have to increase the tax base. Under 1.8 million persons report an income of more than R10 lakh a year while over 5.2 million invested more than R2 lakh in mutual funds in FY12. A detailed look at individual taxpayers is even more instructive. While 89% of taxpayers in FY12 said they earned under R5 lakh a year, they paid around 10% of all personal income taxes (PIT) in the year; 5.5% of taxpayers reported annual incomes of between R5-10 lakh and they paid around 15% of total PIT; another 4.3% of taxpayers reported annual incomes of R10-20 lakh (the quasi-rich) and they accounted for 12% of PIT; the rich, those with incomes of over R20 lakh, accounted for just 1.3% of taxpayers and they paid 63% of all PIT. So, the rich are paying a lot of taxes. In the US, by way of comparison, the top 1% taxpayers paid 37% of income taxes and the top 5% paid 57% of income taxes.
Drill a bit deeper, and you find that while the rich (the R20 lakh-plus persons) paid an average tax of R23 lakh, the quasi-rich (the R10-20 lakh persons) paid an average of only R1.3 lakh, suggesting huge evasion even if you take the average income of this group at R10 lakh a year. When you look at a theoretical distribution of the population, to see how many persons actually fall in each category, economist Surjit Bhalla estimates 8.9 lakh persons earn more than R20 lakh and 66.9 lakh between R10-20 lakh a year. Which means around 45% of the rich are paying taxes while just 20% of the quasi-rich are paying taxes (and very low taxes at that). Were the compliance ratios among the quasi rich to rise to the same level as those in the rich group, this would give us around R21,000 crore more of taxes as compared to just R9,500 crore if we put a 10% tax surcharge on the rich. Soaking the rich isnt even efficient.
An inheritance tax, the other idea doing the rounds, may meet a similar fate. It is obvious India is a lot richer than it was in the days we just collected R50-100 crore through this tax, but given the rich hold their estates in hundreds of investment companies, its difficult to see how the taxman will crack the maze. If you keep in mind that 90% of PIT collections come through self assessment and TDS, its not immediately clear the taxman has made any significant breakthrough in getting individuals to pay more taxes through smart sleuthing either.