Friday, October 28, 2011

Law Street in The Economic Times October 2011)

Dear Readers,

Diwali greetings. Journalists partake only a few public holidays, yesterday being a Diwali was a holiday and there is no paper today. But the online edition rolls on and this column appeared in the online edition of The Economic Times.
There is one thing I hate about Diwali the noise and the pollution cause by a massive display of fireworks. Spot hates it too and hides beneath the bed, and comes out on occasions to bark his head off, and adds to the noise. Noises aren't healthy not even in tax land or in the process of policy formulation.
There needs to be clarity on what exactly the governments want to do, more so, in a cash strapped economy. Click here to read more, or as usual scroll down.
Hope the coming year will be a good one for you.
Best regards,

A cacophony of noises
• A higher tax rate across the board for the top slab would harm
• Distinction could be made between passive and non passive income
• PF issues for international workers must be sorted

Spot hates Diwali because of the noisy fireworks. Noises are disturbing. Thus, when PC (our former FM), mentioned that the rich must be prepared to pay higher taxes, it sparked off a debate.

In the US, Warren Buffett hastily clarified his statement about the wealthy having to pay more taxes. His clarification, picked up by news reports, states that he is advocating “a higher tax rate on people who make money with money only….. If they earn money by normal jobs, what I say would not hit them at all!” Meanwhile, Prez Obama, introduced the Buffett Rule, which creates a new tax on the wealthy, but as an ordinary tax rate. A huge difference from what Buffett actually meant.

In Germany, France and Italy a few of the richest people have stood up and said: Tax us more, we shall help the troubled economy. Can India just cherry-pick the sentiments prevailing in some of the developed countries?

PC was right in saying that his statement will not go down well. Psychologist Shigehiro Oishi, has recently looked into the relationship between the tax mechanism and the quality of life in 54 countries (Incidentally, even the Oecd has introduced a model for computing the quality of life). Using Gallup numbers from 2007, Oishi discovered a direct co-relation between tax progressiveness and a country’s happiness. Is it then logical to say, the more tax the rich pay, the happier that particular country? No. As Oishi explains, it is what the government actually does with the tax payer’s money which makes a country happy.

Zenobia Aunty understands the merits of a progressive system of taxation and understands the woes of the farmers and the need for tax exemption on agricultural income. However, she cannot comprehend why her salary earning, honest tax-paying family members should have to pay more taxes. At present those earning taxable income of above Rs 8 lakh pay tax at 30 per cent, plus a 3 per cent education cess. Perhaps the government may, at the most, increase the highest tax slab to Rs. 10 lakh. Yet, given the inflation trends a higher tax rate across this slab would be unfair.
The best option is to increase the tax base. But if this is impossible, then perhaps the government could consider carving out yet another slab of the very rich and imposing a surcharge on this slab, after having a healthy debate with such stakeholders. Or as Buffett had suggested, perhaps those who earn money with money should be asked to pay more. Currently, long term capital gains arising on shares/listed units of equity MFs are not subject to any tax at all. The Direct Tax Code (DTC) had proposed to continue this exemption. In fact, for short term capital gains, arising if the holding period is less than twelve months, the DTC had proposed that 50% of the short term capital gains would be allowed as a deduction, which would result in a lower tax impact, depending on the slab rate to which the individual belonged. Currently, short term capital gains are taxed in the individuals hand’s at 15 per cent.

A miniscule Securities Transaction Tax (STC) is levied on sale/ purchase transactions undertaken on recognized stock exchanges and on redemption of equity oriented mutual funds. Newspapers reported the possibility of scrapping of STC to boost the share market. True, imposition of tax on long term capital gains on sale of listed shares could dampen sentiments, but in a worst case scenario if there is a need for increasing tax revenue a distinction between passive and non passive income (such as salary income) is perhaps the best approach.

Mind you, Zenobia Aunty is not advocating these measures; she is merely saying that these steps would perhaps be better than imposing a higher tax rate on everyone across the current highest slab.

We cannot compare India with France, Germany or the Italy, where the majority pays taxes and there is also a well-set social security system. So just because a few Europeans have stood up and said we are willing to pay more, the same approach may be harmful to us.

Coming to the issue of social security, PF issues continue. A recent circular issued by the PF authorities seems to imply that an international worker can withdraw his PF money only after retirement or attaining the age of 58 years.

If an Indian employee goes overseas to work in a country with whom India has signed a social security agreement (such as Belgium, Germany, France, Switzerland, Luxembourg and Denmark), such a worker is designation as an international worker. On obtaining a certificate of coverage, he no longer has to pay social security tax in the other country. The whammy of course, being that he isn’t treated on par with other Indian employees when it comes to withdrawals from his PF account. This is certainly not in the best interest of India’s mobile workforce and needs to be resolved.

Source of the photograph