Tax policy will play key role in fighting ‘inequality’: ecological study

Illustration: Binay Sinha

4 minutes of reading Last updated: July 22, 2024 | 21:54 IST

India’s policies on taxing income from capital and labour are likely to play a key role in tackling inequality, according to an economic survey released on Monday.

This is reportedly due to the growing demand for artificial intelligence, which could impact employment and income.

According to economists and experts, despite decades of experimenting with high levels of progressive personal tax rates, as well as wealth and inheritance taxes, the ratio of taxes to gross domestic product (GDP) remains in single digits.

“Inequality is rising and the long-term path is to create more jobs, while in the interim period we have to tax income and equity at a higher rate. That means there could be higher tax rates at the top brackets or a surcharge for the rich. Capital gains tax on equity could also fall under the radar,” said Madan Sabnavis, chief economist at Bank of Baroda.

Citing the 2022 State of Inequality in India report, the study said that “in India, the richest 1% account for 6-7% of total income, while the richest 10% account for a third of total income.”

As added, globally deepening inequalities are becoming a serious economic challenge.

The study shows that the government is focusing on this issue and is undertaking significant policy interventions aimed at creating jobs, integrating the informal and formal sectors, and increasing the number of women in the labour market, with the aim of reducing inequality.

In response to Business standards Asked about the matter, Chief Economic Advisor V Anantha Nageswaran said, “We have progressive rates in both direct and indirect taxes. Ultimately, it also has an impact on the way income is taxed, which is income from labour and income from capital, etc.”

A recent research paper suggested that India needs to impose a 2 percent tax on net wealth above 10 crore rupees and a 33 percent inheritance tax to tackle rising inequality. Economist Thomas Piketty co-authored the paper.

Sudhir Kapadia, Senior Advisor at EY, said, “There is no point in reviving a failed tax system. Instead, the current trajectory of a digitally enabled and transparent tax system with moderately progressive rates has delivered steadily increasing absolute tax revenues. With sustained and stable growth in the economy, tax growth and the tax-to-GDP ratio will increase, ensuring a more equitable tax burden across income levels. It will be better to focus on qualitative aspects of tax administration, including service excellence and reducing unmeritorious tax notices and litigation.”

The study further said that solid revenues would help the government achieve fiscal consolidation. “Significant fiscal consolidation after the pandemic could be achieved largely through strong revenues,” it said.

However, to enhance tax stability, it has been suggested to rationalise tax rates, especially the Goods and Services Tax (GST) rates, eliminate rate inversions, introduce broadband rates for similar products and broaden the tax base.

Tax requirements should also distinguish between serious and less serious offences, and taxpayers should be made more aware of common mistakes, which should encourage voluntary compliance and speed up the resolution of disputes.

The release said that to keep the interest of foreign investors in India’s story, it was necessary to resolve issues related to transfer pricing, taxes and import duties.

Despite amnesty plans to end tax disputes, India is grappling with tax lawsuits over transfer pricing, royalty payments and capital gains. Internal estimates suggest that about 20 trillion rupees are tied up in these disputes.

BREAK UP

– Gross tax revenue growth in fiscal year 2024 is estimated at 13.4%

– This translates into a tax and displacement increase of 1:4

– This was due to a 15.8% increase in direct taxes and a 10.6% increase in indirect taxes compared to fiscal year 2023

– 55% comes from direct taxes and the remaining 45% from indirect taxes from government tax revenues

First published: July 22, 2024 | 15:27 IST