Is a higher corporate tax and an altogether new wealth tax needed in India?
Recently, US President Joe Biden proposed a spate of new or raised taxes—these include increasing the corporate tax rate, levying a differential tax on American multinationals abroad in case they are paying lower than 28% corporate tax and hiking the capital gains tax on the appreciation of assets from 21% to 39.6%. Upon accounting for the Obama care surtax, the increase in capital gains tax would take the effective federal rate to 43.4%. In high tax states such as New York and California, one would see top earners now paying close to 60% in taxes. As expected, these proposals have raised hackles among the opposing Republicans and the wealthy, even though it is reported the increases would affect just 0.32% of American taxpayers who reported adjusted annual gross income exceeding $1mn.
On the other hand, common American citizens, particularly those economically impacted by the ongoing Covid-19 pandemic, seem in favour of Biden’s push to increase taxes, thereby reversing Trump’s tax cuts of 2017 and the century-old precedent of under-taxing investments in comparison to wages and salaries. Most Americans seem to reject the rich minority’s view that tax-raises would cripple an economy that is just beginning to recover from the downturn by hurting workers even more.
Besides narrowing gaps in income and wealth that have been starkly exposed by the pandemic, these tax proposals—which impact those with annual incomes above $400,000—seem to put part of the economic burden of the pandemic on those who have the capacity to bear it the most. The Democrat-led US Administration hopes to convince others in Congress that high earners, both corporates and individuals, must pay their fair share of expenditure, not only for the immediate health crisis at hand, but also for other initiatives such as infrastructure, climate change, child care and education.
Another meaningful line of debate centres on how American businesses reduce their tax liabilities by locating their corporate headquarters outside the US in tax-havens such as the Bahamas, Cayman Islands, Ireland, Luxembourg and Panama, rather than in their own country. Through such practices, and the creation of a web of subsidiaries, the average tax rate was just 11.8% for Amazon, 14.4% for Apple and 12.2% for Facebook. Incidentally, the Guardian newspaper in the UK reported that Amazon’s European subsidiary paid no taxes to Luxembourg (where it has its European headquarter) despite having a turnover of 44 bn euros. By making heavy investments and eschewing profits, its business there reported a loss of 1.2 bn euros, and in fact, secured 56mn euros of tax credits to offset future tax bills.
That such allowances and tax-avoidance mechanisms are no longer welcome was made evident when US Treasury Secretary Janet Yellen suggested that all nations end the burden of tax competition and corporate tax-based erosion (perceived by some as a race to the bottom), and instead agree to a universal minimum corporate tax rate of 28%. If accepted by all, this would ensure that those making money around the world honour their obligation to contribute to the common pot for the common good.
The subject of making the corporates and super rich pay more to the exchequer, especially during this ongoing health emergency, is perhaps nowhere more relevant than in India today. The government, both at the Centre and in states, is struggling to make ends meet. Tackling the different waves of Covid-19 has meant vast unforeseen expenditures, and even partial mitigation-efforts will burn big holes in their pockets. For example, a back of the envelope calculation shows that for the much needed free anti Covid vaccines for 70% of the population alone (the estimate needed to reach herd immunity), would cost the government Rs 65,000 cr. Necessarily, this would imply cutting governmental outlays, both recurring and capital, on other essential measures such as food security, infrastructure-building, and employment-assurance.
As was done in the US by Donald Trump, the Union Government in India too drastically reduced corporate tax rates to 23.9% for existing businesses and 15% for new ones in late 2018; an endeavour to match low tax rates in South East Asia. However, despite that significant reduction, private corporate investment has not risen in India as was hoped, and businesses moving out of China seem to have preferred moving to countries like Vietnam, Indonesia, Thailand or even Bangladesh for labour intensive operations.
Besides revisiting India’s tax set-up on efficiency grounds, especially looking at the multitudes of exemptions and concessions in direct taxes, there is also an explicit need to rationalise the extant GST regime. For example, one striking gap is petroleum, natural gas and the various products derived from it, that have so far been kept outside the GST regime. Increasing international crude prices, and the frequent raising of Central and State levies have taken their retail prices to unprecedentedly elevated levels. Despite three years of fair monsoons, and the consequent satisfactory agri-output, this has been the primary cause for the ongoing wholesale and retail inflation.
There have been clamours to rationalise the taxes and levies on petrol, gas and their products by bringing these under the GST scope. Even at the highest slab rate of 28%, their inclusion would notably lower their selling rates, and provide significant relief to consumers across the board. For both the Centre and States, however, this would cause a significant revenue hit, as current aggregate rates are twice as much. This makes them reluctant to move away from the prevailing discretionary set-up to a more regimented GST regime.
While a more consistent regime would be consumer friendly, the hesitation on the part of the states is understandable. First, they were persuaded by the Centre to give up their authority in fixing sales or transaction taxes in favour of a country wide common value added tax (VAT). Later, in 2017, by agreeing to join the new Goods & Services Tax regime, individual states ended up becoming virtually irrelevant in the broader scheme of Indian taxation. In matters of direct taxes, they already had little role to play right from the beginning, and now, they have few discretionary powers left in indirect taxes, except in the handful of non GST included items.
Indian states have another genuine grievance. For several decades, successive Union Governments have resorted to mobilising additional finances through the imposition of cesses on subsisting taxes, rather than levying new taxes or raising existing rates. They have resorted to this sort of subterfuge because, as per the Constitution, collections from taxes form the divisible pool to be shared with states, while cesses on them can be entirely retained by the Centre for itself.
Particularly through revisiting direct taxes, ways and means have to be found to raise the prevailing low tax to GDP ratio in India, currently at a meagre 10%. Most advanced economies have a 30-35% tax to GDP ratio. Being dependant on streamlining only indirect taxes for additional resources is no longer warranted in India on economic as well as equity concerns. Taxes on commodities and transactions are invariably regressive in nature since they impact the poor disproportionately. This approach ignores the basic taxation principle that those who can afford it should pay more. Taxes on commodities and transactions are clearly inflationary, hurting the poor again disproportionately.
Direct taxes, on the other hand, reduce post tax income inequalities; they drive greater government expenditure and stimulate aggregate demand as the marginal propensity to consume for the poor is higher. Normally, as economies evolve, the proportion of revenue collected from more progressive direct taxes keeps rising. In India, however, such a desirable shift has not taken place and instead the reliance on indirect taxes such as GST is growing. In the year preceding the pandemic, indirect taxes including customs duties brought in almost twice as much as direct taxes.
Globally, post Wave 1 of the pandemic, governments have resorted to high fiscal deficits to fund their economic recovery programs. Usually, such a mode of financing can have mixed results on stock markets. However, since most efforts are now focused on assistance through income transfers, higher provisions for essential public services and in the prevention of business failures, the effect on the markets has been the opposite. In anticipation of a significant ratcheting up of demand for goods and services consumed, particularly in health care, pharmaceuticals, food, e-commerce, logistics, infrastructure and in other targeted employment creating industries, equity markets all over the world have soared to new heights. Consequently, the inequality of income and wealth has widened dramatically between those who have gained from the stock markets and those who have lost jobs and other livelihoods due to the pandemic.
Nowhere is this more true than in India, where the first year of the pandemic also saw the number of its billionaires grow the most. As per a list by Forbes magazine, at the end of 2020, India had the third highest number of billionaires with 140, followed by Germany’s 136 and Russia’s 117. The US took top spot with 724 billionaires, while China is fast catching up with 698, up from 456 the previous year. The three richest Indians alone added $100 bn in net worth between them.
To put this meteoric rise of ultra-high net worth individuals in India in context, consider that in the mid 1990s only two Indians featured in the annual Forbes list of the world’s wealthiest, accounting for $3 bn between them. That number grew slowly at first to 5 by 2002, but by 2017, Indian billionaires had ballooned past 100, with their assets totalling to a staggering $479 bn. With another 178,000 dollar-millionaires in the country, the top 1% of the population in India owns 60% of the country’s wealth. The IMF had ranked India, along with China, as Asia’s most unequal economies. Thomas Piketty, a French economist specialising in global inequality, has demonstrated that the share of Indian national income going to the top 1% has now reached the highest level since tax records began in 1922. The question is for how much longer this should continue. Given the 1% of the population and particularly a fraction of this top has prospered even more in the recent years, should the burden of recovery not be shifted more towards them?
Dr Ajay Dua, a development economist and a public policy expert, is a former Union Secretary.
Part 2 of the article focusing on ways and means of collecting more by way of direct taxes, especially from corporates and ultra-rich individuals, will appear next week.