The bellwether Sensex might have shed 1000 points as soon as the finance minister Nirmala Sitharaman announced a hike in capital gains taxes earned from the bourses but the move has gone down well with the masses, the salaried class that has been chafing at the discriminatory tax treatment of other incomes including salary vis-à-vis capital gains from the bourses.
Yes, parity in taxation has not ensued but these are straws in the wind. Suit-boot ki sarkar jibe has stung. Standard deduction from salary has been upped from Rs 50,000 to Rs 75,000 maximum - an attempt to soothe middle-class anger. Long-term capital gains (LTCG) from the bourses would attract from the assessment year 2025-26, a 12.5% flat tax as opposed to 10% hitherto after exempting the first LTCG of Rs 1.25 lac as opposed to Rs 1.00 lac hitherto. And the short-term capital gains (STCG) from the bourses would attract a flat 20% tax as opposed to 15% now. The market seems to have reacted angrily.
Successive governments have compounded the guilt of placing markets on a pedestal. Modi 3.0 seems to have decided to correct the skew. Income is income, period. Income from any source should be taxed at the same rate. One hopes the committee that is going to swing into action to examine the income tax law takes this initial step forward to the logical conclusion of parity of tax rates without fear or favour.
The announcement that buyback tax on companies buying back their own shares is being given a quietus with the simultaneous announcement of buyback tax on the beneficiary-shareholders couldn’t have come a day sooner. It ought to come in 2019 when the dividend distribution tax (DDT) was replaced by a direct tax on the shareholders getting dividends. Never too late though. One canon of tax justice is taxing the ultimate beneficiary.
The finance minister has also made bold to rationalize the slab rates. First Rs 3.00 lakh would be tax-free from the AY 25-26 as against the hitherto 2.50 lac. From 3 lac to 7 lac, the tax rate would be 5%, from more than 7 lac to 10 lac 10%, more than 10 lacs to 12 lac 12% and more than 12 lac to 15 lac 15%, and more than 15 lac attracting the maximum rate of 30%. The earlier rates were steep, tantalizing one to split income so as to fall into lesser slab rates. While this is a step in the right direction, one could be again wondering which scheme is better from AY 25- 26----the one under which there is no tax if one’s income doesn’t without incentives and deductions exceed Rs 7 lac or under the new slab rates.
For the AY 24-25, this dilemma was capable of being resolved with a fairly simple calculation. If the incentives and deductions did not exceed Rs 2 lac, plump for the first so long as your income didn’t cross Rs 7 lac, and plump for the slab rates if such incentives and deductions exceed Rs 2 lac. A lot more needs to be done while on the path of righting the wrongs on the income tax front. Wealth tax should be restored and become a flower in the bouquet of direct taxes.
Our direct tax package contains a single tax, viz., income tax whereas even the avowed capitalist nations impose estate duty or inheritance tax and a few wealth taxes. Wealth tax is necessary both for ferreting out undisclosed income as well as to boost the exchequer’s revenue. Till 2015, wealth tax was imposed but only on six assets that conspicuously left out shares and bank balance. We need a comprehensive wealth tax of say 1% on all assets in excess of Rs 5 crore so the government can spare the middle class from the crushing tax burden. Revival of death tax or estate duty would achieve this purpose. Indirect taxes are regressive---they impact the poor more. The huge fuel tax affects the poor more than the rich as both pay the same price for petrol. Direct taxes can be targeted at the poor. To run welfare schemes with fuel taxes and GST is the ultimate perversion. They should be run with the help of direct tax collections.
Budget 2024-25 has revealed the government’s long-term thinking. There are straws in the wind. Tax on LTCG and STCG from bourses should be incrementally and gradually brought to the same levels as the rates on income earned through hard toil.
