My expectations for the 2023 budget are unique. Instead of requesting an increase in tax deductions for the middle class (such as through raising Section 80C, 80D, and 24(b)), I believe the government should focus on attracting wealthy individuals to live and invest in India.
Wealth should not be stigmatized, as wealthy individuals can have a significant positive impact on society through their spending and investment. The recent World Cup hosted in Qatar is an example of how spending can drive economic growth and job creation. By offering tax incentives to the rich, they will be encouraged to live, spend, and invest in India
The evolution of taxation in India shows that high tax rates are not always beneficial for nation building. High tax rates often lead to the creation of black money and can negatively impact society.
A thorough examination of the history of taxation in India is necessary to assess the current state of taxation and its impact.
The history of taxation in India can be divided into three phases: 1) Pre-colonial, 2) Colonial period, and 3) post-independence era.
1) In the Pre-colonial
A) HINDU ERA - The Hindu era saw a well-defined form of taxation, while the Muslim era saw the emergence of centralized administration with the imposition of taxes like land revenue, Jazia tax, etc. In Hindu Era, Hindu civilization had a long history of tax systems, dating back to the ancient sage Manu, who stated that taxes should be related to the income and expenditure of the subject. He warned against excessive taxation and advised the king to arrange the collection of taxes in a way that wouldn't burden the subjects. Kautilya's Arthasastra, a classic Indian treatise on politics, economics, and military strategy, provided a detailed form and hierarchy of taxation. It states that the collection of land revenue was an important source of revenue for the Mauryan State, which collected one-sixth of the tax on agricultural produce, levied water tax, octroi duties, tolls, customs duties, and taxes on forest produce, mining of metals, and extraction of salt. The Gupta era, considered the golden period of Indian history, was marked by different types of taxes, including Kalpita/Upkilpta (sales tax), Bhog (tax on agriculture), and others, generating significant revenue for the state.
B) Muslim (Mughal) Era - The Delhi Sultanate and Mughals were two of the most centralized and developed administrations in India during the Muslim rule. They imposed various taxes for revenue generation. One of the main sources of revenue was the Khiraj, a land revenue tax that was imposed at a rate of 1/5th of the produce. Another tax was the Jazia, which was levied on non-Muslims and was seen as a way of discrimination. The Batai system of crop sharing was also imposed where the state would take a portion of the agricultural produce as tax. These taxes helped in maintaining a strong centralized administration and in funding various developments in the fields of art, architecture, and administration
2) Colonial period
The British era saw the introduction and evolution of taxation in India. In 1860, Sir James Wilson introduced the first income tax in India to meet the losses sustained by the government due to the 1st war of independence in 1857. The Indian Income Tax Act of 1860 divided income into four schedules and taxed them separately: (1) Income from landed property; (2) Income from professions and trades; (3) Income from Securities; (4) Income from Salaries and pensions.
In 1918, the Indian Income Tax Act of 1918 replaced the Indian Income Tax Act of 1886 and brought several changes. Finally, in 1922, the Indian Income Tax Act of 1922 was passed, which remained in force until 1961. This act gave a specific nomenclature to various Income Tax authorities for the first time and marked the beginning of the organizational history of the Income Tax Department.
3) Post-independence era
The Income Tax Act of 1922 was complicated due to numerous amendments. In 1956, the Indian government referred the act to the Law Commission with the aim of simplifying it and preventing tax evasion. Finally, in 1961, the Income Tax Act, 1961 was passed after consultation with the Ministry of Law. The act took effect on April 1, 1962, and applied to all of India, including Jammu and Kashmir. Since then, numerous amendments of significant impact have been made to the Income Tax Act through the annual Union Budget, which also contains the Finance Bill. After being passed by both houses of Parliament and receiving the President's assent, it becomes the Finance act. Currently, there are five heads of income: (1) Salary; (2) House Property; (3) Business or Profession profits and gains; (4) Capital Gains; (5) Other Sources.
CURRENT STATUS AND SUGGESTIONS
The current Indian tax rate structure has several different brackets for different levels of income. The highest tax rate for individuals is 35.88%, which is applicable to individuals earning more than Rs 1 crore. This rate is composed of a 30% tax rate plus a 10% surcharge for those earning more than 50 lakh, and a 15% surcharge for those earning more than one crore, as well as a 4% cess. For those earning less than Rs 10 lakh, the tax rate ranges from 2.5% to 20%.
The high tax rate of 35.88% is considered to be a significant contributing factor to the prevalence of black money in India. After paying this tax, a person earning more than Rs 1 crore would have only 64% of their income remaining for their own disposal. This disposable income may then be subject to additional taxes, such as the 6.3% GST on services and goods consumed. As a result, the government earns 42% of a person's earned income, which is seen as going against the basic principle of taxation, which is to only collect 1/6 of a person's income, rather than 2/5ths.
Before any solutions can be proposed, it may be worth considering two cases in which reducing tax rates could help increase both revenue and employment.
1) SEZ (Special Economic Zones)
The SEZ (Special Economic Zones) Act, 2005, was established with the goal of promoting foreign investment, increasing exports, creating jobs, and driving regional development. The act provides tax incentives to SEZ units in the form of income tax exemptions on export income. According to Section 10AA of the Income Tax Act, SEZ units are eligible for 100% income tax exemption on export income for the first 5 years, 50% for the next 5 years, and 50% of the reinvested export profits for the following 5 years.
The concept of SEZ was introduced in India to promote foreign trade and investment by providing a favourable tax regime, infrastructure and a simplified set of rules for businesses. SEZs offer several tax benefits and exemptions to businesses operating within their boundaries, including lower corporate tax rates, exemptions from certain indirect taxes, and relaxation of labor laws.
This reduction in taxation incentivizes businesses to set up in SEZs, leading to an increase in employment and economic activity. Ultimately, this can result in an increase in the tax base and tax revenue for the government.
2) Singapore Taxation
Singapore has become a popular place for company registrations and start-ups from India. Its corporate tax rate is competitive, capped at 17%, which continues to attract foreign investment. Singapore follows a single-tier corporate tax system, where the tax paid by a company on its profits is not passed on to the shareholders (i.e. dividends are tax-free).
Singaporean tax residents are taxed on a progressive scale, with a rate ranging from 0% to 22%. Non-residents are taxed at rates between 15% to 22%. Singapore has no taxes on capital gains, dividends, or inheritance. With some exceptions, foreign-sourced income is exempt from Singapore's taxes.
In general, employment income earned outside of Singapore is not taxable, including income received in a Singapore bank account. Additionally, qualifying foreign-sourced income does not need to be declared.
Conclusion
The government should aim to create a supportive environment for investment and employment growth, rather than focusing on high taxation rates. By capping the maximum limit for taxation and reducing the tax rate for high earners, wealthy individuals will be encouraged to stay and invest in India, leading to job creation. The current tax rate of 42% (including GST) for high earners can be reduced to 30% up to an income of 5 crores, with a 4% cess. A reduction in the surcharge can also be considered. For earnings above 5 crores, a lower tax rate of 15% can be applied.
To reduce black money and promote transparency, the government can also consider reducing the tax rate for capital gains, especially in real estate activities. Currently, 90% of black money is generated through real estate. By reducing the tax rate for immovable property income to 10% for sales below 50 crores and 5% for sales above 50 crores, the real estate sector will be integrated into the taxation network, reducing the likelihood of black money activities. The government should also consider reducing the overall tax burden on wealthy individuals to no more than 20% of their income. This will not only allow them to have more money to spend but will also help in creating a supportive environment for job creation and promoting economic growth.
The presence of wealth and wealthy individuals is important for the growth of a country, as they create employment opportunities, similar to the impact of tourism. The government should incentivize their stay and discourage involvement in black money activities. The idea behind taxation should be viewed as a contribution, not a means for the government to take an excessive share of an individual's income. Ideally, the taxation should not exceed 20% of the person's income.
Wealthy individuals play a crucial role in the economy by increasing spending and creating job opportunities. Their high standard of living, such as staying in luxury hotels and owning large homes, creates employment opportunities in various industries. Additionally, their investments drive economic growth and increase investment activities. To encourage wealthy individuals to reside in India, the government should consider reducing tax rates for high earners. By doing so, they may be less likely to engage in black market activities and will contribute more to the economy through taxes on their income above a certain threshold. This budget should aim to acknowledge and support the presence of wealthy individuals in India and their role in driving economic growth.
Let India become Home for all Wealthy Persons of the world to stay and to invest.
CAclubindia
