Taxing the rich and the middle class for the benefit of the poor is blameless in principle. But has Jaitley gone about this in the right manner?
Arun Jaitley’s Budget may have articulated a clear vision on public expenditure by identifying nine priority areas in which government spending will be directed. But the revenue side of the Budget lacks a similar vision. In his effort to balance the books, the Finance Minister has resorted to piecemeal tax proposals that don’t constitute a broader gameplan or make up a coherent strategy.
Take the controversial proposal to tax withdrawals from pension funds. Moving the Employees Provident Fund (EPF) from an Exempt-Exempt-Exempt (EEE) regime to EET, will mean that 60 per cent of withdrawals from EPF accounts will be treated as income in the hands of the employee. To soften the blow, balances contributed after April 1, 2016 will attract this tax. To make people suffer tax incidence on their retirement savings — and that in a country with an extremely poor social security net — is unjustified. With capital contributions and returns subject to tax at the marginal rate, without adjusting for inflation, this could decimate retirement kitties. Also, this is a form of iniquitous double taxation since contributions made to the EPF (beyond the 80C limit) are deposited out of taxed income. The Finance Ministry’s clarification that ‘high-income’ private sector employees (income above ₹15,000) may opt out of EPF is technically correct. Ideally, the Centre should have migrated all private sector employees to the National Pension Scheme before considering such drastic measures to discourage EPF savings. Hopefully, this suggestion will be adopted in the promised review.
At the other end of the spectrum, there are several proposals taxing the rich. The hike in surcharge for those with incomes of over ₹1 crore, a tax of 10 per cent on dividend incomes of over ₹10 lakh and the levy of higher excise duty on jewellery and branded apparel are some of these. The idea of taxing the super rich to support the underprivileged is blameless in principle. But the Budget has resorted to convoluted mechanisms to achieve this. The dividend tax on high net worth investors (HNIs), for instance, amounts to triple taxation, given the existence of corporate tax and dividend distribution tax. While the HNIs can afford the payout, it will be counterproductive if this move leads the already stingy members of India Inc to cut back on dividend payouts and simply accumulate their money. Overall, the tax proposals in this Budget suggest that the Centre has embraced the view, espoused by the Economic Survey, that most tax concessions in India are subsidies extended to the creamy layer. That may be statistically true. But given that only a minuscule proportion of the population pays direct tax, the task is to ensure better compliance and work towards a tax regime that is fair and equitable.
(This article was published on March 1, 2016)
