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Column: Focus on GST and DTC first

Jan 17 2013, 03:09 IST
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SummarySince the rich save more, a higher tax on them will have implications in terms of overall savings levels.

The chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, has advocated a higher tax slab for the country’s ‘super-rich’ individuals, than the current peak rate of 30%, as an additional source of augmenting government revenues. India’s tax revenue has been falling—from a high of 11.9% of GDP in 2007-08 to 10.1% of GDP in 2011-12. The budgeted tax-to-GDP ratio for 2012-13 is 10.6% of GDP, and indications are that the government is unlikely to meet the target.

Poor tax-to-GDP ratio has also meant a concomitant rise in the country’s fiscal deficit—from 2.7% of GDP in 2007-08 to an estimated 5.8% of GDP in 2012-13. According to World Bank’s Global Development Finance 2012 report, India had the fifth-largest absolute debt stock among top 20 developing debtor countries. In the context of the precarious fiscal health of the economy, Rangarajan has suggested that revenue augmentation should be given equal emphasis as expenditure minimisation initiatives, such as reducing government expenditure on subsidies. Hence the proposal.

India’s income tax regime has remained stable in the past one and a half decade, guided by the philosophy of ‘few rates, low rates’ post-1997 ‘Dream Budget’ of P Chidambaram. There have been no changes in the personal income tax slabs of 10%, 20% and 30% in the past 15 years, though an education cess at 2%, and secondary and higher education cess of 1% of income tax applicable for all persons has been levied since 2004 and 2007, respectively. The yet-to-be-implemented Direct Taxes Code (DTC) has proposed hiking the income tax exemption limit, and has recommended retaining and widening the income limit in the existing slabs. The DTC has proposed a peak rate of 30% on individuals earning more than R2 million per annum. Rangarajan’s proposal for a higher tax-slab therefore does implicitly suggest a need to rework at the DTC provisions as well.

Interestingly, the call for a new peak rate has come at a time when the US Congress has recently decided to raise taxes for the ‘super-rich’ Americans (individuals and couples earning more than $400,000 and $450,000 per annum, respectively) to tide over the fiscal cliff. In September last year, France’s President François Hollande announced a 75% tax for the super-rich and higher levies on business to reduce its fiscal deficit to 3% in 2013. Rangarajan has perhaps taken a cue from such policy responses and has suggested a similar path for India to partly

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