By Asit C. Chandra, Indian Revenue Service (Retd.)

A national daily recently published an article, based on an international confederation’s report, stating that 62 persons own half the world’s assets. Among them are four Indians who have a combined wealth of Rs. 5.13 lakh crore. In the past half a decade, the assets of these 62 persons increased by 44 % and during the same period assets of half the world declined by 41 %. The annual income of the poorest 10 % has not risen even by Rs. 200 a year. The write-up points out that whatever development happened did not benefit the have-nots. Therefore, increasing G.D.P. has no meaning when there is no semblance of equitable distribution.

We have no complaints against the rich becoming richer but we object to the poor becoming poorer. It is rather strange to observe that there was no discussion in media and various crucial forums about this grave issue.

The other important news item says that the share of direct taxes in total collections is going down during the past several years. It has to be considered what measures need to be initiated for collecting more revenue under direct taxes and also lessen financial inequality among people in this country. The Tax Department claims to have found scores of new assessees on the basis of information available in high-value transactions and it is issuing lakhs of notices to non-filers to file returns and thus collect more tax. In these days of luxurious consumption it is difficult to believe that in 2012-13 only 20,000 persons had annual income exceeding one crore each. Therefore, tax administration has to be efficient enough to detect evasion and take effective steps. However, we have to consider whether it is sufficient to substantially improve direct tax collections and remove the glaring disparity.

It is, therefore, necessary to have an overall view of the tax structure. We lament that a bare 3 % of the population pays tax. But it is hard to believe that we can radically improve this figure even if we try our best. Of the total population, about half are women and a great percentage of them are homemakers. Agricultural income is not taxed and about 60 % of the population relies on farming. There are well-heeled cultivators who are out of the tax net and this exemption has also resulted in channelisation of black money. A considerable segment of the population is Below Poverty Line and many earn way beneath the taxable limit. So to expect to radically enhance the number of taxpayers is a pipe dream and even if a substantial number of fringe cases are brought into the tax net the revenue increase will be meagre. So we should look at the present tax policy and see if the taxable entities are properly taxed and whether the horizon should be broadened.

Agricultural income

Whether cultivation should be brought in the tax net has long been a subject of discussion. Almost all government commissions and agencies in this context were unanimously of the opinion that agrarian income should be taxed. Decades back, Dr. Bhimrao Ramji Ambedkar held that from the point of horizontal equity, as far as possible, all income should be viewed in the same manner for tax purposes. Hence income from cultivation should be subjected to identical treatment as non-agricultural earnings with adjustments to take care of farming’s special characteristics. To say that it shall comprise a titanic burden on peasants resulting in higher suicides has no meaning as basic exemption on Rs. 2,50,000 will be universally available. Moreover, if they become taxable entities then there shall be a desire to save, to possess dwellings, insurance cover etc. by availing exemptions in the I.T. Act. It may also not be necessary for small ryots to maintain accounts as the provision of Section 44AD of the Act may be extended in their cases whereby a person doing business and having a turnover of Rs 1 cr. or less has the option of not maintaining accounts and paying tax on presumptive basis. It’s not the average tiller but the landlord lobby and politicians doing vote-bank politics who are constantly creating obstacles in the way of taxing agricultural income.

A tremendous amount of sane political thinking and a mindset devoid of vote-bank politics are imperative to effect the change. There must be a national debate and politicians of differing hues have to put their heads together, be open to the advice of economists and tax experts and take a decision for the nation’s betterment. It’s true that ‘Taxes on agricultural income’ is in the Constitution’s State List but once political will manifests itself action can be taken to put agrarian income in the tax net. If agricultural earnings are taxed then whitewashing of black money can be stopped and that shall be a boon for the economy. In this connection, mention may be made of P.I.L. submitted in the Patna High Court and as a consequence of the Court’s intervention the government assured to investigate cases where agrarian income exceeding Rs. 1 cr. has been declared in I.T. returns. The period for which high-value agricultural incomes are to be verified is April 1, 2010 to March 31, 2013.

Abolition of Wealth Tax

Let us discuss justification for abolition of Wealth Tax by the Finance Act, 2015. It’s true that the U.S.A. do not levy tax on wealth and in recent years some European countries – Austria, Denmark, Germany, Finland, Luxembourg and Sweden – discontinued this kind of tax. However, in the West there is rethinking on this issue. In 2014, French economist Thomas Piketty in his book ‘Capital in the 21st Century’ stated that economic inequality is worsening, proposed introduction of Wealth Tax as a solution and argued that imparity can only be reversed through state interventionism.

What were the arguments put forward by the Finance Minister for abolishing Wealth Tax? He said that revenue from the levy is meagre and collection expenses are extremely high. Strangely, no dissenting voice was heard against the proposal and no effective discussion took place. On the face of it, it appears incongruous that four persons having a net wealth of more than Rs. 5 lakh cr. will not pay a single rupee as Wealth Tax. The crux of the matter is that definition of 'asset' in the Wealth-Tax Act was altered with effect from April 1, 1993 by which broadly building and land; motorcars, yachts and aircraft; jewellery; urban land and cash in hand in excess of Rs. 50,000 are treated as assets. Some exemptions are provided and net wealth of Rs. 15 lakh (Rs. 30 lakh w.e.f. April 1, 2010) or more thus arrived was to be taxed.

Money kept in banks, irrespective of the amount, was not to be included as asset under the Wealth-Tax Act and shareholdings in companies did not find place in the definition of assets under the Act. In India, a chunk of shares of major companies are family-owned and family-controlled. Thus, shares worth lakhs of crores are concentrated in a few hands and remained outside the purview of the definition of asset. Other shareholders were also outside the tax net. If definition of assets does not include these important ones then naturally collection of Wealth Tax shall be meagre. Therefore, instead of rescinding the levy, the Act should have been amended by including all types of property in the list of assets with specific exemptions that are extremely necessary and the basic exemption of wealth under the Act raised to say Rs. 2 cr. However, while reintroducing Wealth Tax the complexities of valuation of assets have to be taken care of so that it does not lead to avoidable litigation and is not counterproductive giving rise to arbitrariness resulting in graft and hampering economic growth.

Dividend income

Coming back to I.T. provisions, we see that dividends paid by companies were being taxed at normal rate (with some exceptions in certain years) under ‘income from other sources’. With effect from June 1, 1997, Section 115O was introduced in the I.T. Act by which 10 % (now 15%) tax was to be charged on dividend declared, distributed or paid out of distributable profits by a domestic company. Consequentially such dividend was exempted in the hands of shareholders. The government made the amendment with the specious reason that taxing the amount in company’s hands on distributable profit would avoid a load of paperwork in the case of companies and hardship in case of small taxpayers. We must not miss the inequity in the entire arrangement. Persons who are in the lowest tax bracket of 10 % or even having non-taxable income are effectively compelled to pay 15 % tax on dividends whereas a large portion of shareholders who normally have to pay 30 % I.T. are paying half of the tax. In these days of computerisation, paperwork should not come in the way of calculations of T.D.S. and other work in a company when the law requires ordinary citizens (senior citizens not exempted) to deduct tax on the purchase of house property of not very high value by today’s standards. Reverting back to the old provision will not only end the inequity but also bring in a lot of revenue. Exemption on dividend income may be fixed at say Rs. 30,000.

In the Finance Act, 2016 the Minister rightly sought to remove a major part of the inequality when he proposed ‘tax at the rate of 10 % of gross amount of dividend will be payable by the recipients, that is, individuals, H.U.F.s and firms receiving dividends in excess of 10 lakh per annum’. This is definitely a good start but more has to be done. However, to remove one anomaly, others are being created. Thus, taxable entities that have no other income shall in effect end up paying relatively more taxes than ones who have substantial other income. People having Rs. 10 lakh or more other income and less than Rs. 10 lakh as dividend income will still effectively pay 15 % tax on dividend income. It will be better if the old system of taxing dividends as income from other sources is brought back and dividend income is taxed as ‘income from other sources’. That shall make the law simple and effective.

Long-term capital gains

Section 10(38) of the I.T. Act gives exemptions to the profit arising out of transfer of equity shares in a company or unit of an equity-oriented fund, if they are held for more than one year. Security transaction tax (a very nominal amount) is chargeable on such transaction. Thus, instead of paying 20 % tax on such profits, assessees go sans paying almost any tax even in cases of sales of sizeable amounts. This concession is available for the past 12 years. It’s high time that it goes, especially when rates of I.T. are quite low.

Rates of tax on industrial undertakings and personal I.T.

We have seen that industrial undertakings are given various exemptions for years thus bringing their effective tax rates much below the rates specified. The Finance Minister has taken steps to phase out the tax exemptions and incentives and simultaneously bring down Corporate Tax rate from 30 % to 25 %. But is there any case to reduce I.T. to 25% on corporate income? This rate already is rather low and does not require a further reduction.

The Minister of State for Finance himself said that tax rates in India are among the lowest in the world. The highest personal I.T. slab has declined from 93.5 % (including surcharge) in 1970-71 to 35.4 % (including surcharge and cess) whereas the highest Federal I.T. slab in the U.S.A. is 39.6 %. Therefore, one more slab may be introduced in personal I.T. at 40 % for income exceeding Rs. 1 cr. When the state is providing all the facilities to these taxpayers to earn such a high income they also should pay back a part of it as taxes. It’s time to take steps to narrow the glaring inequalities in society when on the one hand we see persons purchasing residential property by paying hundreds of crores of rupees while on the other people are sleeping in the open in the Delhi winter.

Conclusion

Now the government wants resources for improvement of agriculture, bettering living standards of the not so privileged, development of infrastructure for new industries, improvement of communication, defence purchases and various other activities. To garner resources for all these and to lessen the inaccuracies in society we must remove the uncalled-for tax exemptions to sectors that can and should pay. However, people also should not feel that their precious money is wasted and going into wrong hands in special schemes formulated for improving the conditions of less-privileged citizens. The tax-paying public also should see that they are getting something back in the form of improved public services and they are not harassed, treated arbitrarily and embroiled in unnecessary tax litigation. The Finance Minister has taken numerous steps to improve the scenario in this regard but a lot more has to be done. We have also to see how these steps incorporated in the Finance Act are put into practice.

 (The writer retired as Director General Income Tax.)