India is a tax haven for the rich as they do not have to pay any tax on their dividend income. But the middle-class citizen has tax deducted at source even on the paltry interest received from savings bank accounts
President Obama of the United States is proposing to levy a tax on people earning over $1 million a year, calling it the "Buffett Rule" as a part of his long-term deficit-reduction programme and to stem the country's escalating national debt.
The "Buffett Rule" is nicknamed after billionaire investor Warren Buffett, because he is said to have made a statement that rich people like him in the US often pay less in tax than those who work for them, due to loopholes in the tax provisions. The present proposal, therefore, is designed to prevent millionaires from taking advantage of lower tax rates on investment earnings than what middle-income taxpayers pay on their wages.
During last year, Warren Buffett's total income was $46 million and his average tax rate was 17.7%, due to his investment income being charged at 15%. His secretary's income was $60,000 on which average tax rate was 30%.
If in the US, the rich are paying a lower tax on their investment income, India is a tax haven for the rich as they do not have to pay any tax on their investment income, because the dividend income is totally tax-free at the hands of the shareholders. As per media repots, the aggregate dividend earned by business houses last year was Rs48,191 crore on which no tax was required to be paid. The Tata Group dominated the business houses on this count and its 29 group companies together paid Rs3,845 crore as dividend to the holding company, on which the holding company did not have to pay any tax.
Here is a list of the top ten individuals whose dividend income runs into crores of rupees, totally tax-free under the existing laws in India.
It is ironical that a common man in India has to pay income-tax even on the paltry amount of interest that he receives on his savings bank account, if his total income crosses the basic exemption limit of Rs1,60,000 per year. And if he places his surplus savings in fixed deposits with commercial banks, the income-tax gets deducted at source from the interest received on these deposits, even before he receives any interest from the bank. On 8th August, Moneylife had written on the agony and suffering undergone by the common man to get TDS (tax deduction at source) certificates from banks and the harassment meted out to him by the tax authorities to get refund of such TDS (See: TDS is not only tedious, it is sheer harassment. Government must make interest from banks free from income-tax).
The paradox of life in India can be best explained by the following examples:
1. The rich and the wealthy do no pay any tax on crores of their investment income, but the poor and the middle class have to pay taxes even on a small amount of interest received from banks on their savings account and fixed deposits.
2. The tax provisions make a distinction between 'earned' income and 'unearned' income. The unearned income on stock market investments including capital gains is either tax-free or taxed at a lower rate. But the common man who earns through his sweat and toil has to pay tax at 30% because it is considered as earned income.
3. The common man has to pay Rs70 per litre for petrol used for running his two-wheelers and small cars, which are run only on petrol, while the rich pay only Rs40 per litre for diesel used by them on their Mercedes vehicles and BMWs, the big luxury cars which run on diesel.
4. While the banks offer car loans to the rich & wealthy at interest rates varying from 10% to 12% p.a., poor students are offered education loans at rates varying from 14% to 16%.
5. As the saying goes, if you borrow a small amount from a bank, you are at the mercy of the bank and if you borrow a few crores from the bank, the bank is at your mercy. This is in fact a reality, because small borrowers are hounded and persecuted if they fail to repay, but large borrowers are given five-star treatment like CDR (Corporate Debt Structuring) facility, moratorium on payment of interest and instalments and of course, lower interest rates including waiver of penal interest charged etc.
6. If big companies are unable to honour their commitments and become virtually bankrupt, technically called 'sick', they are given all the benefits of a five-star hospital and admitted to what is called the BIFR (Board for Industrial and Financial Reconstruction). Once admitted to BIFR, no creditor can file a suit for recovery, nor can banks proceed against them. Because of this luxury of protection from creditors, companies feel comfortable to continue to remain sick indefinitely, though the promoters of many such companies continue to be healthy and flaunt their wealth in unproductive activities. But this facility of protection from the creditors is not available to common people who have their own small businesses, and they have to face the wrath of the banks and other creditors, even if they are genuinely in trouble due to external circumstances.
The common man and the ordinary middle-class citizen of our country is suffering under the burden of rising inflation and due to the apathy of the banks and government institutions, and they have nobody to champion their cause.
It is, therefore, to support their cause and improve their life to some extent, that the Moneylife Foundation (article dated 6th September, see: Moneylife Foundation sends memorandum on TDS to the FM, RBI ) submitted a memorandum to the Hon'ble Finance Minister, requesting him to exempt from tax, all interest paid by commercial banks on savings accounts and fixed deposits—which if conceded, will provide some succour to a large number of middle-class people of our country.
Let us hope that the FM listens to our appeal and provides the
much-needed relief to the people of this country by enacting necessary modifications to the tax laws in the Finance Bill or the Direct Tax Code (DTC) coming up during the current financial year.
(The author is a financial consultant and he writes for Moneylife under the pen name, 'Gurpur')
The two sides have agreed to stay committed to deepening bilateral investment co-operation, further opening markets and improving the investment environment in both countries to lay a solid foundation for pragmatic co-operation between the businesses of the two countries
Beijing: Holding their first comprehensive Strategic Economic Dialogue (SED) here today, India and China have reached an understanding to deepen bilateral investment cooperation, further open up markets to each other and improve the investment environment, reports PTI.
High-level delegations led by India's Planning Commission deputy chairman Montek Singh Ahluwalia and China's National Development and Reform Commission chairman Zhang Ping had a very positive and successful dialogue on stepping up cooperation and coordination on a host of economic issues, Indian officials said.
The two sides have agreed to stay committed to deepening bilateral investment co-operation, further opening markets and improving the investment environment in both countries to lay a solid foundation for pragmatic co-operation between the businesses of the two countries on the basis of complementarities, mutual benefit and win-win outcomes, minutes circulated at the end of first session said.
The two sides also agreed to strengthen cooperation on energy efficiency and conservation, as well as on environmental protection.
Both sides agreed to actively foster co-operation on energy, including the renewable energy sector, in order to promote sustainable development.
Enhanced exchanges in these spheres would be the new engine for greater co-operation between the two sides, the minutes said.
In his opening address, Mr Ahluwalia said India and China share many commonalities.
"China's economic reforms began a decade and more before those of India. Your achievements in transforming your economy are well recognised all over the world. We in India are deeply impressed by your progress and we believe there are many lessons from your experience that may be valuable to us," Mr Ahluwalia said.
He noted that both countries had Five Year plans for their development strategy.
"You have unveiled your Twelfth Plan and we are going to finalise our Twelfth Plan in 2012," he said.
"Challenges like energy efficiency, water pricing, management of urbanisation and rapid modernisation of infrastructure are common to us also," he said and proposed that the first goal of the SED should be a continuous exchange of economic experiences on all critical sectors from which both nations can benefit.
In his address, Mr Zhang said as the world's economic and political landscape is undergoing 'profound changes', India and China as developing countries are faced with rare and historical development opportunities.
"Since we are at the important stages of acceleration of industrialisation and urbanisation, our two countries are faced with similar or even identical problems in the course of development," he said.
He hoped that the SED will enhance mutual understanding and trust between India and China by drawing upon each other's strengths and experiences in economic development to seek mutually beneficial co-operation
"By doing so, we will enhance our practical co-operation in various fields and find solutions to our common problems.
This will help promote long-term and steady development of our respective economies and have a profound impact on our two countries," Mr Zhang said.
Unemployment rates have to drop, only then will aggregate demand go up, which will then boost economies across the globe
The crash of falling shares all over the globe has given rise again to fears of more recessions. Most commentators are focusing on European sovereign debt as the crisis de jour. However, one may point out that the problems with European sovereign debt have been going on for over a year. There are enormous potential problems due to misallocation of capital in emerging markets that haven't yet appeared on the radar. But the real problem that is bothering economies, at least for now in developed markets, is the lack of demand, and for 'demand', read jobs. Until the unemployment rate drops and more people become employed, aggregate demand will suffer.
In the US, the president and his Democratic party have put a Bill before Congress that is supposed to create jobs. The programme basically has two elements. It hopes to create jobs by spending money to build, or rebuild physical infrastructure. It also hopes to create jobs with classic Keynesian stimulus by cutting taxes. In short, it is attempting to cure the problems with money.
This is normally not such a bad idea if you were farsighted enough to understand the concept of a business cycle. It is a good idea to squirrel away some savings in good times to carry you over the bad. But politicians can't resist spending money, usually on their friends and families. Economists and promoters always assure us that business cycles are a thing of the past. So many governments, again in the developed world, didn't save for the inevitable rainy day and the cabinet is bare.
The US Opposition party, the Republicans, feel that just spending money is not a good idea, although they spent over eight years doing just that. Enthralled by newfound fiscal orthodoxy, they are worried that the money has to come from somewhere and that somewhere is the rich. These rich, we are told, are "job creators" and if you tax them they won't create jobs. If you look at the US economic history over the past 50 years, you will find that this thesis is simply not true. Strong economic growth and job creation did in fact occur when taxes for the wealthy were high. So reigning in the taxman is not the answer.
Many people today are looking at the Chinese model. China has been able to create millions of jobs and move those employed millions out of poverty. They were able to do this with industrial policies that limited household income in order to spur manufacturing growth and investment. This had the obvious secondary effect of speeding up employment and, with it, household income.
Seems like a good idea, until you consider that the programme was and is filled with unsustainable subsidies and imbalances. The Chinese economy is tilted in an unprecedented way towards investment and away from consumption. Its currency has been kept low artificially in order to move the excesses of this policy onto its trading partners. The subsidies are given disproportionally to friends of the state in the state-owned sector. The private sector, the main source for jobs, has been starved. The combination leaves China inordinately exposed to a global slowdown, trade restrictions, enormous bad debts, and eventually serious job losses.
The Chinese have another way to hinder job growth. They don't protect property rights. Since property rights can be denied at any time, the private sector's incentive to grow and hire more employees is severely restricted.
India and Brazil have sadly adopted labour codes from Europe. These laws weren't worried about creating jobs. They were worried about protecting workers. They have been exceptionally successful. They have worked so well that it is almost impossible for employers to fire even the most incompetent employee. In addition, there are myriad of taxes and regulations that make compliance difficult and require vast amounts of time to do so.
The Noble Laureate Ronald Coase proposed in his famous theorem that it did not matter what the initial allocation of property rights in the law was. As long as the transaction costs were low enough, the parties could bargain their way to an efficient outcome. And that is the rub.
Bureaucrats and politicians have raised transaction costs. They do so by failing to define property rights; failing to enforce property rights; creating barriers to realising property rights, and finally constantly changing the property rights. This is the last thing that employers need. Employers, to create jobs, must invest. Any investment is a bet on the future. If the laws are inconsistent, they cannot make this bet, because they don't know what the future holds.
To create jobs, governments need to do theirs. Their job is to create clear property rights and enforce them. But this is one job that none of them seem able to do.
(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).