Income tax on our rich should’ve been rejigged

News: This article discusses the view of former Reserve Bank of India governor C. Rangarajan on taxation. The article says tax rules should be made easier for better tax collections. India needs direct tax reforms because tax relief is not enough.

How the government missed the opportunity to simplify the tax rate?

Pandemic has increased government spending, which has also increased fear of increasing tax burden. However, the Union Budget 2022-23 has not increased this burden, with no rate hike for all income brackets. It has given relief to taxpayers, but the government missed the opportunity to make some changes to simplify taxes with minimum fiscal damage.

Why the view of former Reserve Bank of India governor C. Rangarajan on taxation should be considered?

One, he suggested that the multiple cesses and surcharges that are levied should be withdrawn. A clean new slab should be created at the top with a rate of over 35% but under 40%. It will bring clarity on what top earners must pay and also help out states which are in need of fiscal space.

Two, bringing clarity on the tax rate is required. For example, in the mid-2019 budget, it was declared that a surcharge on the tax liability of individuals earning over ₹5 crores a year will be levied. It resulted in a peak effective rate of almost 43%. This tax on tax increases complexity, and it is against the principle of simplification of taxation.

Three, tax claims which are near the 50 percent mark of what one earns create disharmony among taxpayers. Hence, a burden level above 40% is perceived as punitive.

Four, high tax rates are also one of the reasons which are enabling people with high incomes to leave India for friendlier tax regimes overseas. Also, multinational employers are willing to relocate executive talent abroad as a retention strategy. For example, an increasing option of work-from-anywhere after the pandemic, which basically means ‘any tax jurisdiction’.

What is the way forward?

First, the peak rate on top earners should be under 40%, the same way corporate tax rates are dropped to attract investment.

Second, a clean 35% slab for multi-crore incomes is needed without any tax on tax. Also, India needs to phase out dual-rate system because it goes against the basic principle of keeping taxes simple. Furthermore, cesses were meant to be temporary, hence they must be withdrawn.

Source: This post is based on the article “Income tax on our rich should’ve been rejigged” published in Live mint on 10^th Feb 2022.