The taxation silly season is here

Second, if you look at those earning between Rs 10-20 lakh a year, the average tax they paid in FY12 was Rs 1.3 lakh, or just 8.6 per cent of their average incomes. If this is not huge tax evasion, what is? Even if you assume an average annual income of Rs 1 crore for those taxpayers who report incomes as over Rs 20 lakh, their tax incidence was still an impressive 23 per cent — income tax data show an average tax payout of Rs 23 lakh for each person in this group.

It gets more interesting when you look at the number of rich people in the country. Since the government doesn't collect data on incomes, you have to rely on theoretical models based on what data is collected. Such estimation by economist Surjit Bhalla suggests there are 8.9 lakh persons in India who earn more than Rs 20 lakh a year (the rich) and 66.9 lakh who earn between Rs10-20 lakh (the quasi-rich). Which means 45 per cent of the rich are paying taxes compared to just 20 per cent for the quasi-rich (and very low taxes at that). Were the compliance ratios among the quasi-rich to rise to the same level as those for the rich, this would give us around Rs 22,000 crore more of taxes, as compared to just Rs 9,500 crore if we put a 10 per cent tax surcharge on the rich. In other words, concentrate on the middle classes, forget the rich.

But why not, to get back to soaking the rich, just tax the rich a bit more. We may get more money by tackling middle class evasion, but surely Rs 9,323 crore more from the rich can't hurt? Actually, that may not be correct either. Not only is there enough evidence from the world, and India, to show modest taxation is better, a higher tax on the rich just increases the gains to be made by declaring lower incomes — how else do you think the Rs 10-20 lakh group gets away with just an 8.6 per cent tax? Put a higher tax on the rich and their lakhs of CAs will find efficient tax shelters to take cover under — even if you don't believe the ridiculous Baba Ramdev black money figures, how else do you generate such monies if it weren't for the helpful CAs?

... contd.

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