Rely on direct taxes to mobilize resources
Make corporate and capital gains taxes more progressive and double their ceilings.
The current Covid-19 crisis has catalyzed broad public support across countries for the imposition of taxes on high incomes. While no one likes higher taxes, the severity and rapid spread of the pandemic has apparently made several sections of the wealthy more willing to take greater responsibility for the welfare of the community as a whole. Combine this shift in sentiment with a desperate need for higher government spending, and now it’s up to those with the power to harness it successfully. It requires a carefully designed and easily executable plan that gives everyone fair treatment.
In the Indian context, efforts have been underway for some time to evolve an iteration to effect periodic tax movements. A direct tax code, 2009 for the next five years was one such outcome. The change of Union government in 2014 brought back the previous practice of ad hoc annual changes. However, in 2017, a group of experts was tasked with suggesting a future course on a more definitive basis and completely rewriting the Income Tax Law of 1961, 2019 and a draft of the new legislation of the ‘income tax. For reasons not shared, the government has responded to the call to put it aside without making the findings public, instead of acting on the recommendations.
In addition to choosing a medium-term path on which to act, immediate equity considerations justify widening the rate differential between those who are roughly eligible for personal income tax and those who are at first rung. At present, on annual taxable income exceeding Rs 2.5 lakh and up to Rs 5 lakh, employees pay a 5% tax. It may be desirable to double the exemption limit to Rs 5 lakh, without insisting on contributions for small savings, FP and insurance, etc. The pandemic has broken the backs of many in this category and noticeable relief for this section is warranted. On the other hand, while keeping the slab rates in effect for those with taxable income reaching Rs 1 crore at 30%, it is time to consider higher slabs of up to 60% for incomes above. beyond this level. A potential executive would increase slab rates by 10% for each additional crore of taxable income, with the maximum rate reached at Rs 4 crore. The current increases of up to 37% of the basic tax and an additional 4% for education and health can be totally dispensed with while rationalizing the structure.
Instead of being maintained almost at a fixed rate, the corporate tax system should be progressive, similar to the structure of personal income tax.
Firms with larger profits should be distinguished from those that are more or less able to make ends meet in their business. In addition, there is little justification for maintaining a differential rate between foreign and domestic companies. The current tax rate of 30% should only be maintained for entities with taxable profit less than Rs 1 crore. As profits increase beyond that, a 5% increase in rates for each Rs 10 crore should be considered, with a cap rate of 40%; a profit level reached at Rs 21 crore.
The 25% special tax rate for companies not claiming any kind of exemption and the 15% special tax rate for green field manufacturing facilities, both introduced on January 1, 2019, may disappear. In addition, the criteria for turnover between companies below and above Rs 400 crore may be waived. Surcharges and excesses on any type of corporate tax do not need to remain in the revised structure. Such a decision would introduce the well-justified progression of corporate taxation. Allowable capital and depreciation allowances should be fine-tuned to ensure that over time the two combined do not exceed 100% of the value of the assets created.
While streamlining corporate taxation, the scope of the employment allowance, which is tax-exempt for businesses, needs to be broadened. It must be made eligible even for contract workers. Such labor is particularly prevalent in manufacturing and most service industries, and there are several companies where contract workers now outnumber regular workers. In addition, expenses incurred by employers to hire apprentices and to upgrade the skills of all workers may also be included.
We must also recognize that the wealth tax experiment has almost always failed, with only half a dozen small European countries currently having it. It is necessary to be cautious about its re-introduction in India so soon after its elimination in 2015. While the apparent reason cited at the time was meager collections, insufficient data collected on valuation assets ( until recently, tax returns did not have columns for details of real estate assets, gold bonds or stocks) and limited means for tax authorities to verify the position on the ground, were also undoubtedly responsible. Equally important was the fact that on many occasions the holder of qualifying assets did not have the necessary liquidity to pay wealth tax as there had been no recent transactions in these.
From both an administrative and taxpayer convenience perspective, it is desirable to attempt to achieve the same objectives by modifying the existing capital gains regime. At present, the tax rate for long-term capital gains viz. where real estate assets and gold bonds have been held for over three years and stocks and mutual funds for over a year, accounts for 20% of time-indexed earnings. In the event of shorter-term gains, the rate of the applicable personal income tax bracket is maintained. While retaining the current general capital gains regime, long-term capital gains must also shift from a flat rate to a more progressive structure, as do existing personal income tax rates and the tax structure. company proposed above. Slab rates should be linked to the quantum of capital gains realized during the tax year, the minimum rate being the existing 20%. Tax slabs above Rs 20 crore can be increased by 5% for each additional Rs 10 crore gain, up to the highest slab rate of 40%, which would become applicable to long-term gains exceeding Rs 60 crore.
A levy on capital gains, unlike the concept of a wealth tax, does not make the holding of assets in itself taxable because it only applies when net of the time indexation, the profits are made from of a sale. Giving it a progressive character would make it fair, while lending itself to administrative convenience since the eligible gains are made through the receipt of checks and other banking instruments, as well as tax returns necessarily reflecting the gains on the sale of assets. With banks, stock exchanges and deeds sub-registrars now digitally linked to the tax office, it is no longer easy to cover up a transaction of monetary importance.
Another area of change that a revised capital gains regime must address is the addition of provisions to encourage wealthy Indians to donate assets and property to charity during their lifetime in order to avoid significant tax burdens on capital gains. Without a cap on the various itemized deductions for high earners, a proposal to do so would encourage the wealthy and their heirs to transfer assets that appreciate over time to nonprofits.
The introduction of a slab system, along with doubling the maximum rates for corporations and capital gains, as well as for personal income tax rates, would clearly tie taxation to the ability to pay taxes. taxpayers. Removing the surcharges and complicated existing transfers would simultaneously improve membership and meet the urgent requirement to dramatically increase entries into the pool of taxes shareable with states. Such fairness to states would also make it easier for them to opt in to include excluded items such as gasoline, diesel and natural gas in the GST regime.
Restructuring of tax rates by introducing the new bracket rates should be done over a defined period of time and not all done in one fell swoop. The process could start in the next Union budget, with the rate increase being limited to the addition of an additional tranche each year, with the ceiling rates proposed for the three taxes above being reached over two to four years. .
Since four new slabs are proposed to be introduced into income tax rates, going from the current 30% to 60% per annum would take three years, while corporate tax rates would drop from 30% to 40% in two years. , since only two slab rates of 5% each would be added. Increasing capital gains from 20% to 40% would take 4 years, with each tranche rate differential being 5%. If their impact would be phased, all the proposals should however be announced at once to make the process transparent and predictable for all stakeholders. It would also give relevant assessors the space and time to prepare for higher expenses and provide sufficient advance notice to adjust business plans. The removal of surcharges and overruns should also be calibrated, with their complete removal coinciding with the maximum rate achieved.
While any substantial plan to raise taxes should be zealously launched by Prime Minister Narendra Modi himself, fair treatment of all, including targeted payers, will have to be the hallmark of the program. While the suggested changes described here will constitute a significant shift, such a development has parallels with mainstream Western tax thinking, particularly in the United States, where efforts are underway for several upward revisions to fund programs aimed at “Build back better” after the pandemic. . There is no doubt that every country is unique, with national governments making changes according to their own circumstances and realities on the ground. However, understanding what has worked and what has not worked elsewhere and aligning with the global thinking on tax progressivity can be helpful as India reforms its own tax system.
Dr Ajay Dua, development economist and public policy specialist, is a former secretary of the Union.