It was a relief to most payers of income tax that the Union Budget for 2022-23 left this burden largely unchanged. The Covid surge of state spending has spurred a bill that must be raised at some point, sooner or later, and many feared a tax squeeze. There was an uproar to raise taxes on the country’s rich, particularly, in a situation that required more reliance on direct than indirect taxes. To the extent that taxpayers of all income groups were spared from the rate hike, the government did little to cheer the crowd. Yet, it did not do what could have been done with minimal financial damage to simplify and limit this tax. In the context of this missed opportunity, C. Rangarajan, former Governor of the Reserve Bank of India, is worth considering. He argued that many of the cesses and surcharges that we levy could have been done away with and a clean new slab could have been created on top of our marginal tax structure with a rate of more than 35% but less than 40%. This will provide clarity on what the top earners will have to pay and also help cash-strapped states, which get a piece of the tax collection pie that omits additional levies, which go by various names.
In her mid-2019 budget, soon after the Narendra Modi government won re-election, Finance Minister Nirmala Sitharaman had announced a surcharge on tax liability of high-income individuals. 5 crore annually. At 37.5% on tax payables assessed in the top bracket, which carries a 30% marginal tax on income, that levy plus a smaller cess was levied—resulting in an effective effective rate of about 43%. In addition to the complexity of such taxes on taxes, a practice that openly breaks the principle of taxation simplicity, that rate presents the country with a special problem. Any tax claim that is close to the halfway point of one’s earnings is seen to create dissatisfaction among the taxpayers. While there are exceptions, there is no doubt that burden levels above 40% are considered punitive, especially by the mobile elite globally, which is aware of extreme rates elsewhere. As it happens, cross-country comparisons hold more relevance than our tax authorities admit. One of the quiet changes, both disrupted and enabled by the outbreak of Covid, was high-income people leaving Indian shores for a friendly tax regime overseas. An actual sample of movers would suggest assistance in some cases from multinational employers willing to move executive talent abroad as a retention move. Work from anywhere, that great gift of this pandemic has been explicitly interpreted by some as ‘any tax jurisdiction’. By the same logic of lowering corporate tax rates for India to attract investment, we should have gotten our peak rate on those earning less than 40%. If capital is mobile, so are the rich.
While the slap-on-free 35% slab would have been welcome for multi-crore income, we should also do away with our double-rate system, which is whether or not a major chunk of deductions and exemptions are deducted by taxpayers. Its intricacies also go against the basic principle of keeping taxes simple. Even those who opt for the clarity of tax-free liability calculations must contend with the cess. Since these were meant to be temporary, they should have been removed as well. In general, there are enough studies that show easier rules of taxation, leading to better tax collection overall. We didn’t just need tax relief from the budget for 2022-23. We needed direct tax reforms.
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