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Not even small change (Letters to the Editor)

Not even small change (Letters to the Editor)

Author: S. S. Bagai, New Delhi
Publication: The Economics Times
Date: May 12, 2001

This refers to ``Budget in retrospect'' (ET, May 3) by Dr Shankar Acharya. He thinks that the FM has sacrificed revenue of Rs 5,000 crore by abolishing surcharges.

Just like most FMs of Independent India, he too seems to be under the impression that changing the surcharge rates changes the quantum of personal IT revenue.

Yet, over the last six decades tax payers have actually been living proof of the fact that `rates' never determine revenue, but only the quantum of tax evasion and black money.

To get an idea of changes in rates consider the example of an individual whose income has remained fixed at the level of Rs 3 lakh (in rupees of 2001) ever since 1939.

In 1939-40 he was liable to pay tax of Rs 6,900 - in 1959-60 Rs 19,200 and, in the current assessment year Rs 73,450. The average rate of the tax applicable has seen over a ten-fold rise.

Then look at the revenue position. Personal IT revenue (as a proportion of non-agricultural national income) was 2.24 per cent in 1939-40, 2.63 per cent in 1959-60 and 2.24 per cent for the assessment year 2000-01.

These revenue figures show the utter contempt with which taxpayers treat the IT rates. It is plain that the pushing up of rates by ten times at certain crucial levels of income has not yielded any extra revenue; what, then, is the significance of these petty surcharges?

The vast majority of taxpayers changes the quantum of income to be disclosed in the returns, responding to every changes in rates so that tax liability remains unchanged.

If an individual had been disclosing his entire income of Rs 3 lakh in 1939-40, he now discloses only about Rs 90,000 so that the tax payable by him remains at around the Rs 7,000 that he used to pay in 1939.

It is strange how, despite six decades of evidence to the contrary, FMs and their advisers continue to cling to the belief that rates and surcharges determine the quantum of revenue.

What explains their misconception, perhaps, is the experience of the developed countries.

The latter, through heavy taxation rates, have pushed a large part of the non-salary income mostly outside their tax systems and the bulk of their revenue is derived from salary earners only.

Changes in rates have a huge impact on revenue because the salaried class cannot easily escape. That is very unlike the Indian case, wherein the salaried class is minute and hence rate changes are of very limited significance.

My example and the rate and revenue figures I gave only show that pushing up the rates was not meant to collect any additional revenue, but only to create and sustain institutions of near universal tax evasion and black money.

Even the surcharges levied last year do not appear to have increased revenue (although final figures are yet to come). Abolishing them will not reduce revenue either. S S Bagai, New Delhi.
 


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