Normalise tax rates for individuals, Cos

If a person has Rs 50 lakh, he can invest it in a piece of land; or he can invest it to educate himself (labour); or he can invest it in a public company as capital. We will take 4 years as the tenure of these investments. The investment in a company gives dividends annually and after these 4 years gives a capital gain; a 12% gain per annum is reasonable to expect.

The dividends are tax free and the capital gains, as long term gains, are tax exempt. If he had invested the Rs 50 lakh in agricultural land, the income from the produce is tax free; the capital gains from the sale of these agricultural land after these 4 years is also tax free. If he had invested Rs 50 lakh to get a college education, the salary income from the employment is taxable beyond Rs 2.5 lakh.

Individual income tax payers filed about 93.3% of the total number (391.28 lakh) of tax returns. However, the total tax paid by individuals amounted to 42.8% of the total tax collected. Out of these, individuals in the income bracket below Rs 10 lakh filed 92% of the returns but the tax collected from these 92% is only 23.3% for a total of Rs 104,152 cr ($16 billion) out of the total tax revenue of Rs.446,720 cr as of 2014-15.

The Centre must announce individuals with less than Rs 10 lakh salary need not pay taxes; raise the tax bracket. It would then be treating the 3 factors equally.

There is then the incentive to invest in education to create good quality labour. The problem of lack of skilled labour is because there is no incentive to invest in education to upgrade people’s skills. Employers do not pay well for entry level jobs. The Centre takes away a good chunk as taxes. So, we have uneducated employers with capital invested in land and companies enjoying tax free income and tax exempt gains, and who are unwilling to pay for educated labour force.

While the Centre will lose Rs 104,000 cr in tax income, which it can make up elsewhere, what this will do to the economy is a huge boost. It will also bring 3.5 crore votes to BJP. It will also make tax administration more efficient since they need to focus only on the 8%.

Individuals in this bracket (under Rs 10 lakh) will spend this $16 bn (Rs 1,04,000 cr). This increase in annual spending will result in about $100 bn in direct investments by the industry to meet this new demand – a 5% growth in GDP. More importantly, it will boost indirect investments and spending. The Centre can make up this Rs 104,000 cr elsewhere. This is just about 1 month’s GST collection.

The increased investment by the industry and the spending by individuals will together bring back this lost revenue in less than 1 year in the form of GST on this increased spending/investment and also on the income tax on the increased profits of these companies.

Also, keep the tax rate for Individuals at the same rate as for companies. Now, tax rate on firms has been lowered to 25%. So, keep the same rate of 25% for Individuals above Rs 10 lakh.