Taxing the rich and other fantasies

But if the average compliance rate is 31 per cent, then it means the tax administration is only gathering a third of the actual taxes owed. If every taxpayer was an honest conformist, the total tax revenue in India in 2011-12 would have been Rs 5,51,000 crore, more than three times the actual collection of Rs 1,72,000 crore. It is for this reason that many analysts (and all the economists attending the finance minister's meeting in early January) argue that putting a tax surcharge on the super rich is "pissing in the wind" compared to the increase in tax revenues obtained from a modicum of reform in tax administration.

The last few years have seen a significant amount of concern on the part of the polity, and especially the middle class, on corruption in India. This class is no longer taken in with platitudes about helping the poor and therefore let us sock it to the rich. And while the elite of this class, especially the intellectuals, will take up whatever the glitterati concern is in the US and apply it with equal force in India, the pragmatic middle class wants some questions answered. For example, if there is such massive leakage in public distribution systems, why shouldn't there be better enforcement? And if there are food subsidies for the poor, then how come the food continues to rot in ever larger numbers?

And how come two-thirds of the potential tax revenue is lost? This cannot happen without the full and enduring compliance on the part of tax administration officials. Today, income tax reforms mean an improvement in tax administration and an increase in tax compliance. And before you begin to fret, note that all the data indicates (including the bad "official" data) that tax compliance among the super rich (>20 lakhs) is more than three times the compliance in the Rs 5-10 lakh category.

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