S. Murlidharan

S. Murlidharan on the need to stop pampering the rich

`TAX according to ability' is a fundamental canon of taxation and may, therefore, appear to be trite. Yet, over the years it has been followed more in breach than in compliance what with the well-heeled managing to wangle tax sops every now and then, thanks to their superior lobbying power.

The tax-free limit of Rs 50,000, fixed as it was more than five years ago, needs to be doubled. That the tax-free limit is much higher, thanks to the availability of standard deduction, an argument often adduced to stifle the well-merited claim, is specious because business-income and interest, for example, do not get any standard deduction.

As revenue neutral measure, the liberal increase in the tax-free threshold may be matched by a concomitant denial of tax-free income to those having an income of more than Rs 10 lakh. As it is, firms and companies are taxed on every rupee of their taxable income — there is no tax-free limit for them. If they are perceived to behaving greater capacity to pay tax and hence considered not worthy of enjoying tax-free limit, there is no reason why high net worth individuals, amongst others, should not be similarly considered.

The Kelkar Committee was on dot when it recommended abolition of various tax shelters available to earners of long-term capital gains. For example, one can completely avoid tax on long-term capital gains by parking the gains in specified bonds for just three years within six months of earning it. This is kid's play, especially for the well-heeled. There is no reason why they should be so indulged especially given the fact that the rate of tax on long-term capital gains in any case is concessional — 20 per cent. The soft-tax of 10 per cent on long-term capital gains from sale of shares too is unmerited. That this is on only when the assessee forgoes the indexing benefit on cost does not detract from the merit of what is being canvassed. Already the tax rate on long-term capital gains is concessional. There is no need to gild the lily.

It is time the Government stopped looking at stock market as something sacred. Investors in any case do not flock the stock market with an eye on tax sops. The current regime of distribution tax at the rate of 12.5 per cent on dividend payable by corporates with a concomitant exemption from tax in the hands of the shareholders also betrays a similar slant in favour of the rich and the affluent.

Nobody should be deluded by the protagonists of this regime when they say that its raison d'etre is to put an end to double taxation of dividend. The truth is there is still double taxation: 35 per cent corporate tax plus 12.5 per cent distribution tax.

The regime, the brainchild of the incumbent Finance Minister, Mr P. Chidambaram, wittingly or unwittingly pampers the rich shareholders by letting them off with an indirect tax of 12.5 per cent even while subjecting to tax those below tax free limit as well as those otherwise eligible for exemption from tax on dividend.

As it is, one self-occupied residential house is tax-free irrespective of its size and income potential. This regime too is biased in favour of the rich. A palatial house with a potential rent of Rs 5 lakh per month is treated on a par with a LIG house with a potential of just Rs 1,000 a month. Nothing can be more farcical than this. In such a regime, a person owning two LIG flats will be obliged to pay tax on one, whereas the one ensconced in a mansion can cock a snook at the taxman.

Tax rebate under Section 88 is not available to those individuals whose gross total income (GTI) is in excess of Rs 5 lakh. This seemingly may seem to be an anti-rich measure but in fact it hurts the middle class as well.

The Government, in fact, may fine-tune the existing regime to make it difficult for the high net worth individuals to get this rebate. For example, those having a GTI of, say, more than Rs 10 lakh may be required to invest a larger amount to be eligible for the same tax rebate.

This way the Government may be able to mobilise funds for its social infrastructure schemes, to finance which, it is toying with the idea of an across-the-board surcharge.

For the AY 2004-2005, surcharge of 10 per cent is applicable to those with an income of more than Rs 8.5 lakh. There is no reason to depart from this. If anything, the proposed surcharge should be only on those with a taxable income in excess of Rs 10 lakh.

(The author is a Delhi-based chartered accountant.)

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