Regressive Taxes in India

All democratic countries have a tax structure that increases the tax rate with increase in income. This achieves a double whammy higher taxable income and higher % share of taxes.
The noble aim of these progressive taxes being:

  1. Cross subsidizing the poor with taxes from the rich.
  2. Creating a healthy socio-economic mobility in through merit, diligence and luck anybody can scale up the social ladder.
  3. The society benefits from people who earning/spending is a reflection of the superior human capital, enterprising nature and hard work. Living off the inheritance (solely) is not productive for the society.

In US there has been so many voices saying that the rich are not taxed enough. Surprisingly when I take their arguments in Indian context, I feel that rich Indians are not taxed at all. Here is why:

  1. Estate tax & inheritance tax. These 2 taxes, ensure that inherited wealth cannot fuel the opulent lifestyle of the rich. Everybody needs to work hard to sustain themselves rather than the fortunes of their ancestors. Every developed nation has one version of this tax or the other. It allows government to prevent wealthy become super rich. Incidentally independent India has a land ceiling bill to prevent too much land (Wealth) concentration, modern India feels no need and is happy taxing the poor.
  2. Capital gains tax is surprisingly lower than regular income tax. Not surprisingly it is only the rich that have capital to gain on. The poor will put their money in Bank FD which are taxed at the full 33% rate (no inflation indexing or lower tax benefits)
  3. Most people often don’t end up paying the capital gains tax because if you re-invest in property the government will forgive it. No idea what is the rationale for this ruling
  4. Dividend income in India is tax free! WHY should you and I sweat and give 1/3 of our earnings as taxes while the rich can earn tax free. Even any gains from day trading is lower and if you hold your stocks for 12 months it is completely tax free.
  5. The industries have access to so many government subsidies, SEZ, tax holidays and sops but I have never heard a middle class getting a letter saying “Your work is important and I understand that you are finding it difficult to make your ends meet. Hence I honor you with a 5 year Income Tax holiday.”
  6. Unlike the west India collects more spending based taxes than income tax. The problem with this is that the poor spend a larger portion of their paycheck on consumption than rich. Hence effectively VAT, sales tax, exercise tax, octroi are taxes on poor. Also sales/service/exercise tax is payed at a flat rate rather than progressive slabs as in Income tax. This means that effective tax rate for the poor is higher.
  7. Government of India subsidizes higher education (IIT/IIM) for rich kids that will go abroad, air travel (Air India) for rich. While the quality of road, power, water, education & basic infrastructure needed for social mobility is low. This means that poor don’t get an equal opportunity to move up the social strata.
  8. Rather than investing to improve the reach of clean water, electricity, railways and primary education we subsidize them. This in effect means that rich who have access to these amenities to begin with continue to enjoy it at the expense of the poor.

I have always been intrigued by the book “Rich Dad, Poor Dad” by Robert Kiyosaki. Essentially it says:  “Individuals who earn and then pay taxes on what they earn, corporations earn, spend what they want to spend, and pay taxes on what’s left.” This compounded by knowledge of tax legislatures and effective use of tax havens, subsidies and incentives ensures that over time Rich grows richer.

6 replies on “Regressive Taxes in India”

equity dividend is taxed at DDT 17.5 ? this budget , before it was at 15%, this means that small investors pay the same amt of tax as the super rich which is plain unfair
Capital gains are tax free , so they make huge cap gains when they sell their scripts eg the ranbaxy singh duo, the piramals, the essars of vodaphone etc who sold their majority / large stakes in paired trades on the exchanges ,,, which is plain fraud , considering that the whole idea was to benefit / promote small investment and investor culture.
But for the rich person it is easier to lobby or pay off the politician rather than pay the taxman … if u read the polyester prince , ambanis had a record of getting tax laws changed for benefit of reliance , so much so that the book quotes the telegraph? wherein current president was called Minister of Reliance rather than minister of finance .

prax. welcome back. these were exactly my thoughts….
poor save in FD which is taxed at full rate
middle class in property where the capital gains are taxed at a lower rate
rich own and run companies where the corporate tax rate is lower and the capital gains is totally free

Dude the rich invest firstly in Politicians and Influencers , then in property, in companies, fds, gold , silver , bullion, art etc and then they mortgate it and invest moneys again in such manner that the public holds the bag while they get rich.
Eg Essar steel and ports , they got large amt of debt from uti ifci icici and other psu banks which they defaulted and got written off at paltry amts … i had to suffer loss … and then they make loads of money in vodaphone and in same essar steel and ports with corporate restructuring and cheating small investors and then lo and behold when they have garnered majority shares the share value jumps

Thomas Piketty has a nice book which says that if the return on capital is more than the GDP growth rate, then there will be concentration of wealth with poor becoming poorer. Unfortunately in India by making capital tax free this is exactly what we are seeing.

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