New Delhi: Even as income inequality rises inexorably in India in a potential threat to the country’s socio-political stability, an industry chamber has opposed the idea of the government levying higher taxes on the super-rich.
“You cannot tax a country into prosperity,” Anil Khaitan, president, PHD Chamber of Commerce and Industry, told The Wire in an interview, while pointing out that the share of taxes has already reached the staggering level of 70% in the government revenue.
He argued that with the pool of income-tax payers being too small (only 3-3.5 crore of country’s 125 crore citizens pay income-tax), raising tax rates is not the best way to addressing the government’s chronic revenue crunch.
Recent reports from international rights group Oxfam and World Inequality Lab, a research group on inequality, show that income inequality has risen at a much faster in India in recent years compared to the world average.
According to the recent Oxfam report titled, ‘Reward Work, Not Wealth’, India’s richest 1% garnered as much as 73% of the total wealth generated in the country in 2017.
The report said it will take 941 years for a minimum wage worker in rural India to earn what the top paid executive at a leading Indian garment firm earns in a year. World Inequality Report, authored by renowned economists including Thomas Piketty and published in late December, 10% of Indians garnered 56% of the national income in 2014.
Khaitan’s comments come in the run-up to this year’s budget, which will be announced later this week.
Significantly, Khaitan has also supported replacing income-tax with banking transaction tax (BTT), an idea floated by the Sangh Parivar that failed to find traction with economists and rejected by both prime minister Narendra Modi and finance minister Arun Jaitley.
The idea of BTT replacing the current tax systems (direct and indirect taxes, except for customs duty) was suggested by Arthkranti, a Pune-based thank-tank that is better known for floating the idea of demonetisation Rs 1,000 and Rs 500 notes.
However, economic think-tanks like National Institute of Public Finance and Policy (NIPFP) have rejected the idea, saying it is no way superior to the current system.
“It (BTT) fails to achieve the extent of equity that we have in the current system. It promises a broader base for taxes in its design but ends up advocating some exemptions, which ultimately shrink the tax base and takes the shine of BTT away,” said the NIPFP report “Evaluation of Arthkranti Proposal”.
Dwelling on government’s fiscal challenges, Khaitan said that focus should be shifted to raising resources through non-tax sources like disinvestment and monetisation of land parcels rather than tax hikes.
He suggested bringing down corporate tax rate from 30-35% to 20% while doing away with incentives. Khaitan also called for reducing the highest personal tax rate to 20-25% and hiking taxable threshold for individual tax payers from Rs 2.5 lakh to Rs 5 lakh.
The trade body president also suggested abolishing Minimum Alternate Tax and Dividend Distribution Tax. He maintained that by doing away with the twin taxes, the government would get more revenue.
Khaitan said suggested that the government focus on disinvestment of public sector assets and monetisation of land parcel held by government bodies like railways and PSUs, as it can yield lakhs of crores in non-tax revenue.
He expressed concern over the high share of budget allocation (Rs 5.23 lakh crore in 2017-18) going towards payment of interests on country’s outstanding loans and shrinking share of the budget as a proportion to the GDP and stressed the need for redesigning the budget.
“As per new body of India, a new budget has to be designed,” Khaitan said.
Khaitan rejected the suggestion that the government hike taxes on the super-rich as part of the strategy to reduce income inequality in the country, saying “Prosperity only comes from productivity”.
The Economic Survey 2017-18, tabled in parliament on Monday, highlighted that there has been a decline in the reliance on direct taxes in India which account for just about 35% of total taxes as against a contribution of about 70% in Europe.
Unlike other countries, reliance on direct taxes in India seems to be declining, a trend that will be reinforced if the GST proves to be a buoyant source of revenue,” the survey said.
The survey underlined that fiscal decentralisation captures the idea that spending and tax decisions must reflect local preferences as far as possible. “However, in India the states generate very low share of about 6% of their revenue from direct taxes while the figure is 19% in Brazil and 44% in Germany,” the survey highlighted.