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Moneylife » Economy & Nation » Taxation » While the US is planning to tax the rich, India’s tax burden falls on the poor

While the US is planning to tax the rich, India’s tax burden falls on the poor

Gurpur | 26/09/2011 01:17 PM | 

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')

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pravin 4 years ago

the top 1% of US citizens pay 38% of the 10% pay 70% of the taxes in the US. and this is unfair because?
while i agree lower income folks are taxed too much,it doesnt come at the cost of the rich dividend earners.dont try to make it a us vs them scenario.that would be a blatant attempt to divide citizens.
the reason rich people get cheaper loans is because they are more credit worthy.simple economics and no racism.
investment should be encouraged further.if you want go ahead and tax those rich fellows(it is the easiest thing to do).the only problem is,investment will reduce,jobs will reduce and there will be lesser income earned by the lower classes -given that jobs will be fewer.

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NAGESH KINI 4 years ago in reply to pravin

There is nothing 'fair' or 'unfair'. It boils down to fat cats wallowing in unearned wealth paying taxes at lower rates, evading taxes, stashing funds abroad. After Warren Buffet, many others like him came forward. Not one from Mera Bharat Bhahan, Magar hum sub hai pareshan, Kyu ki 99% hai beimaan. QED

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Prakash 4 years ago in reply to NAGESH KINI

I beg to differ with your comments. On your comment on 'not one from....' is inappropriate. We do not have to ape US. They are in deep shambles not India. Their banking operations were dubious resulting in sub prime, not ours. And by the way... which percentage you would put yourself in ..99% or 1%. The answer is obvious. If you put yourself in 1% then others too have a right to call themselves honest. And if you are amongst 99% then you have no right to comment. I am not denying that we do not have corrupt people all around, but putting 99% is going too far without any stats.

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nagesh kini

nagesh kini 4 years ago in reply to Prakash

Mr. Prakash you don't have to be personal in slotting anyone in the 99% or 1% category. For your info. I'm in neither!
GBS had said "Lies, damn lies and statistics".
Don't expect precise numbers in such matters.
Even the GOI/SC appointed High Powered Committee/ SIT can not even 'guestimate' the extent of the parallel economy, black money or the monies stashed abroad.

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Spider Rico

Spider Rico 4 years ago in reply to pravin

"... and this is unfair because?"

That's a valid question. Here's the answer: It's unfair because harvesting from the remainder of the population the funds necessary for this country to operate would create a such a burden that it would affect many's ability to meet the most meager of their financial obligations: food, shelter, and clothes.

To suggest that these individuals dig deeper into their already stressed financial resources while the most privileged people in the world -- literally -- watch their effective tax rate plummet is shameful.

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ramchandran 4 years ago

The FM always calls upon Coporate Heads seeking their advise on poilicy making , does he ever call Anna Hazare as to what needs to be done for the common man??? . Its a lop sided world. India must learn from other examples in the west say Singapore where you pay high taxes & also get the quality of life.

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pantulu 4 years ago in reply to ramchandran

I fully agree with the view that seeking the advice of Corporate Heads is not correct since we have very few people like Tatas or Narayana murthy. The rest will only bother about their own interests and not about even their own employees who create fortune for them. This country has lot of talent and there should be no difficulty in forming a high level panel to suggest the best way of taxation. What is required is political will which is absent.

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Prakash 4 years ago

I am not in agreement with the author on certain points:

- As regards the dividend income, you have tried to make your point by showing big businessmen whose worth anyways is thousands of crores. But by highlighting and alleging that 'rich' get away with tax free income in form of dividend is not an entirely true statement. There are lakhs of middle class people (including widows) who run their houses and struggle to meet their dreams and responsibilites from their "dividend income" which comes from their hard earned money invested wisely in stock market. Taxfree dividends in their hands is a blessing for them. If this is taxed then it would be burden on them. Just because you eye few big industrialists earning crores from dividend does not mean you do injustice to lakhs of people surviving on dividend income. You cannot and should not ape West in everything.

Though I am a strong supporter for removing bank interest and any other interest earned returning below 8%, to be removed from tax bracket. In today's time of high inflation, a meagre 4.5% from savings bank SHOULD NOT BE TAXED.

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Vikas Gupta

Vikas Gupta 4 years ago

In my opinion, there is no need of Income tax or TDS. The things which are used by Rich people only should be brought under Transcation Tax which should be at entry level e.g. you put a limit on Price of Cars that anybody who purchases a Car of more than X Rs. has to give Y % tax on the transcation amount. Similarly, Limits & Percentages can be set for Different Luxurious items based upontheir necessity, demand & use.

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Nagesh Kini FCA

Nagesh Kini FCA 4 years ago

The worse part is the income divide is worsening by the day. To add to the miseries of the poor is the utterly absurd Planning Commission filing declaring Rs.32 for urban and Rs.26 for rural India as thresh hold for declaring the Below Poverty Line classification.
The netas and babus and the High Networth Individuals wallowing in tax sheltered perks like bungalows, cars and tax free incomes, including under the table payments and 'reimbursements' are not in sync with the realities of a small income earner like a hand cart puller or food vendor who is the first target for rioters and who income for the day is taken away by anyone and everyone declaring a bandh - in Telagana it is going on for 14 days. The Courts have declared them illegal, but these BPL have not lobbies and don't constitute vote bank. They and their kids go to bed on empty stomach. The great divide is for ever widening. Who cares?

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Prakash 4 years ago in reply to Nagesh Kini FCA

It seems you have a problem with HNIs. Well, for your knowledge not all HNIs have amassed their wealth from dubious means and 'under the table' means. If HNIs are enjoying 'tax free' incomes today then they also have made absurdly high tax payments during early years. If the taxes paid by HNIs are not reaching the masses, that does not mean you once again penalise HNIs and axe their 'tax free incomes'. Fight with the authorities to channelise and mobilise the various taxes collected. Fight for the money stashed abroad.

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