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.