It was a relief to most payers of income tax that the Union budget for 2022-23 left this burden broadly unchanged. The covid enlargement of state spending has totted up a bill that must be picked up at some point, sooner or later, and many had feared a tax squeeze. A clamour had arisen for raising taxes on the country’s rich, especially, in a situation that lent urgency to relying more on direct than indirect taxes. To the extent that taxpayers in all income brackets were spared rate hikes, the government pulled off something of a crowd-pleaser. Yet, it did not do what it could have done with minimal fiscal damage to simplify this tax and keep it range-bound. In the context of this missed opportunity, the views of former Reserve Bank of India governor C. Rangarajan call for consideration. The multiple cesses and surcharges that we levy, he argued, could have been done away with and a clean new slab created instead at the top of our marginal tax structure with a rate of over 35% but under 40%. This would offer clarity on what top earners must pay and also help out cash-strapped states, which get a slice of a tax collection pie that leaves out extra impositions that go by various names.
In her mid-2019 budget, soon after the Narendra Modi government won re-election, finance minister Nirmala Sitharaman had declared a surcharge on the tax liability of individuals earning over ₹5 crore a year. At 37.5% on tax dues assessed in the top bracket, which bears a 30% marginal tax on income, that imposition—with small cesses slapped on—resulted in a peak effective rate of almost 43%. Apart from the complexity of such taxes on taxes, a practice that openly flouts the canon of taxation simplicity, that rate presents the country with a particular problem. Any tax claim that nears the halfway mark of what one earns is observed to stir dissonance among taxpayers. While there are exceptions, no doubt, a burden level above 40% tends to be perceived as punitive, by and large, particularly so by a globally-mobile elite that’s aware of peak rates elsewhere. As it happens, cross-country comparisons hold greater relevance than our tax authorities may like to admit. One of the quiet shifts that was both interrupted and enabled by the outbreak of covid was of folks with high incomes leaving Indian shores for friendlier tax regimes overseas. An anecdotal sample of movers would suggest the assistance in some cases of multinational employers willing to relocate executive talent abroad as a retention ploy. Work-from-anywhere, that great gift of this pandemic, has apparently been interpreted by some to mean ‘any tax jurisdiction’. By the same logic of dropping corporate tax rates for India to attract investment, we should have got our peak rate on top earners under 40%. If capital is mobile, so are the rich.
While a clean 35% slab free of slap-ons for multi-crore incomes would have been welcome, we must also phase out our dual-rate system that goes by whether or not taxpayers forgo a panoply of deductions and exemptions. The intricacies of this also go against the basic principle of keeping taxes simple. Even those who opt for the clarity of a no-tax-off liability calculation must contend with cesses. As these were meant to be temporary, they should also have been axed. In general, there are enough studies that show easier rules of taxation result in better tax collections overall. Tax relief was not all that we needed from the 2022-23 budget. We needed direct tax reforms.
