Taxes

Dan Gilmore in an article on taxes explains the importance of paying taxes. He quotes Oliver Wendell Holmes :

Taxes, Oliver Wendell Holmes wrote long ago, are ``the price we pay for a civilized society.'' Those words have been twisted by everyone on every side of a basic question -- namely, whether we pay too much in taxes -- but their fundamental truth remains unchallenged.

He explains some of the reasons why we should be paying the taxes and why the government need them.

First, government is not our enemy, at least not most of the time. We demand services, and eventually we have to pay for them.

and adds some more. The rest of the article is more for the US but looking at the Indian perspective I feel that as a country we need to think and understand the importance of paying taxes. The kelkar report has generated the maximum reviews, opinions and debugging in the recent times. A recent article in the Business Standard provides some statistics vis-a-vis other countries in comparison to tax rates, tax slabs and tax payments.

The Kelkar committee has recommended that the exemption limit be raised from Rs 50,000 to Rs 1,00,000. If we look at it from the point of view of subsistence-level requirements, then it is justifiable that at least Rs 1,00,000 a year should be tax-free so that an individual fulfils his minimum requirements.

However, considering that currently only around three per cent of the population are taxpayers in India, as against 46 per cent in the US, 48 per cent in the UK and around 53 per cent in Australia, the ratio of individual taxpayers in India to total population, which is quite low, will drop further with the proposed increase in the exemption limit to Rs 1,00,000.

The present exemption limit of Rs 50,000 is already more than the per capita GDP. If the exemption limit is raised to Rs 1,00,000, the gap between per capita GDP and exemption limit will increase. In the UK, US, Australia and even in Malaysia, the basic exemption limit is much lower than per capita GDP.

As far as the personal income tax rate structure goes, these countries follow a progressive tax rate schedule. The number of slabs in general is four or more. Although the maximum marginal tax rate varies from 28 per cent in Malaysia to 47 per cent in Australia, the level of income at which the maximum tax rate is applicable in India is much lower than the level of income at which such rates apply in other countries.

There are variations in the minimum tax rates as well, ranging from 1 per cent in Malaysia to 17 per cent in Australia. It appears that most countries have followed the ?ability to pay? principle. The Kelkar committee recommendation to raise the exemption limit from Rs 50,000 to Rs 1,00,000 and to reduce the number of slabs from three to just two does not fulfil either the ability to pay principle or the revenue consideration.

The conclusion of the arcile makes most sense but it remains the toughest agenda for any government.

Thus, the Kelkar committee?s recommendation to reduce the number of slabs from three to two does not seem logical. Instead of making the tax rate structure inequitable and inconsistent with the trend in other countries, the government should ensure better taxpayer compliance and create confidence among taxpayers that it will utilise the money for the welfare of the general public.