There is no reason why wealth tax should not be restored and become a flower in the bouquet of direct taxes
The bellwether Sensex might have shed 1000 points as soon as Finance Minister Nirmala Sitharaman announced hike in capital gains taxes earned from the bourses but the move has gone down well with the masses especially the salaried class that has been chafing at the discriminatory tax treatment of other incomes including salary vis-à-vis capital gains from the bourses.
To be sure, even after the budget announcement, parity in taxation has not ensued but these are straws in the wind. Suit-boot ki sarkar jibe has stung apparently. Standard deduction from salary has been upped from Rs 50,000 to Rs 75,000 maximum at the same time in an apparent attempt to soothe middle class anger.
Long term capital gains (LTCG) from the bourses would attract from the assessment year 2025-26, a 12.5% flat tax (not progressive tax at slab rates ) as opposed to 10% hitherto after exempting the first LTCG of Rs 1.25 lac as opposed to Rs 1.00 lac hitherto. And the short-term capital gains (STCG) from the bourses would attract a flat 20% tax as opposed to 15% now. The market seems to have reacted angrily at this perceived lese majesty.
Successive governments have compounded the guilt of placing markets on a pedestal. At last Modi 3.0 seems to have decided to correct the skew. Income is income, period. Income from any source should be taxed at the same rate.
One hopes the committee that is going to swing into action to comprehensively examine the income tax law takes this initial step forward to the above logical conclusion namely parity of tax rates without fear or favour. BTW the budget announcement to the effect that buyback tax on companies buying back their own shares is being given a quietus with the simultaneous announcement of buyback tax on the beneficiary-shareholders couldn’t have come a day sooner.
In fact, it ought to have been announced in 2019 itself when dividend distribution tax (DDT) was replaced by direct tax on the shareholders getting dividend. It is never too late though. One of the canons of tax justice is tax the ultimate beneficiary.
The finance minister has also made bold to rationalize the slab rates. First Rs 3.00 lac would be tax-free from the AY 25-26 as against the hitherto 2.50 lac. From 3 lakh to 7 lakh the tax rate would be 5%, from more than 7 lakh to 10 lakh 10%, more than 10 lakh to 12 lakh 12% and more than 12 lakh to 15 lakh 15% and more than 15 lakh attracting the maximum rate of 30%. This is as it should be.
The earlier rates were steep, tantalising one to split his income so as to fall into lesser slab rates. While this is the step in the right direction, one could be again wondering which scheme is better from AY 25-26 - the one under which there is no tax if one’s income doesn’t without incentives and deductions exceed Rs 7 lac or under the new slab rates.
For the AY 24-25 this dilemma was capable of being resolved with a fairly simple calculation. If the incentives and deductions did not exceed Rs 2 lakh, plump for the first so long as your income didn’t cross Rs 7 lakh and plump for the slab rates if such incentives and deductions exceed Rs 2 lakh. Now the game is wide open. High income individuals would most likely veer to the new slab rates which are far less than the rates obtaining right now.
While the path for righting the wrongs on the income tax front has been chalked out, a lot more needs to be done. There is no reason why wealth tax should not be restored and become a flower in the bouquet of direct taxes. As it is our direct tax package contains a single tax namely income tax whereas even the avowed capitalist nations impose estate duty or inheritance tax and a few wealth taxes.
Wealth tax is necessary both for ferreting out undisclosed income as well as to boost the exchequer’s revenue. Till 2015, wealth tax was imposed but only on six assets that conspicuously left out shares and bank balance.
We need a comprehensive wealth tax of say 1% on all assets in excess of Rs 5 crore so that the government can spare the middle class from the crushing burden of taxation. In fact, revival of death tax or estate duty would achieve the same purpose.
Indirect taxes are regressive - they impact the poor more. To wit, the huge fuel tax affects the poor more than the rich and the famous as both pay the same price for petrol. Direct taxes can be targeted at the poor.
To run welfare schemes with fuel taxes and GST is the ultimate perversion. Instead, they should be run with the help of direct taxes collections. Budget 2024-25 has revealed the government’s long-term thinking. There are straws in the wind.
One hopes through successive budgets the tax on LTCG and STCG from bourses are incrementally and gradually brought to the same levels as the rates on income earned though hard toil. If anything, unearned income likely celebrity endorsement fees and mind-boggling appearance fee of advocates should be taxed at higher rates. But that could be the subject of another article for another day.
-- FPJ
