(A detailed version of this chapter in notes #301.025 on http://facebook.com/mehtarahulc )
Download this chapter 25 : http://www.righttorecall.info/301.pdf
25.1 Summary of changes RRP proposes in tax system
I at RRP aim to bring following changes in tax structure using TCP. So please note — my proposal is not that citizens should bring us in power and we would print below mentioned law-draft in the Gazette. My proposal is that we activists should raise mass movement to get TCP printed in the Gazette. And once TCP is printed, citizens opinion on following drafts can be collected :-
1. Enact Wealth Tax : Enact Wealth Tax for Military, Police, Courts, education of subjects needed by Military and Roads. The tax will apply on market value of land, construction by size and later on market value of shares and bonds, gold, silver and metal. Details are given in coming sections of this chapter.
2. Enact Inheritance Tax : Enact Inheritance Tax for Military, Police, Courts, education of subjects needed by Military. This tax will apply on entire wealth of the person who has died.
3. Reduction in Income Tax : The main emphasis will be on wealth tax and inheritance tax, and as that tax provided the revenue, the income tax will be reduced.
4. Abolish all tax benefits to SEZs
5. Use “instant purchase by higher price” to reduce use of black money in land purchases
6. Abolish all export subsidies and all export related tax exemptions except that all income in dollars will be tax exempt till debt is repaid
7. Abolition of tax exemptions given to charities etc. Cancel 80G, 35AC etc.
8. Trusts will get exemption of Rs 20 per member per year. And one citizen can become member of at most five trusts.
9. Abolition of ALL excises except few items like vehicles (which will be used strictly for funding roads), fuel, electricity etc.
10. Abolish VAT, sales tax, service tax
11. Abolish Octroi
12. About 300% customs duty and 1/3rd of customs duty collected will directly go to citizens.
13. Reduce stamp duty (transfer tax) to 1%
14. Health tax on tobacco, liquor only to cover medical subsidies given to illnesses due to tobacco, liquor etc. The tax on tobacco, liquor etc will not be used to cover any other expenses.
15. Incomes of HUFs will be bracketed with Karta or taxed at corporate rates as Karta may wish
16. No wealth tax exemption for HUF’s wealth . Wealth of HUF will be bracketed with Karta or taxed at highest rate as Karta may wish.
17. National ID system to track wealth ownership and incomes
18. Universal banking system to track payments and reduce tax evasion
19. Upgrading National ID System : the NID of the person will be also his bank account number and also his email address as well as his mobile number as well as his driver license number.
20. Abolish tax exemption given to cricket and all sports bodies
21. Abolish tax exemption given to movies in regional languages or any grounds.
25.2 The concept of Regressive Taxes
What is a regressive tax?
Given a tax, I analyze following aspect of a tax, and classify the taxes in 3 categories — flat tax, regressive tax and progressive tax
Say some military, police etc need Rs 5000 cr
Say there are 5 cr individuals in a nation and together their income is Rs 50000 cr.
Now say the taxes are adjusted in such a way that each person ends up paying 10% of his income. Such a tax is called as flat tax (flat wrt income).
If the taxes are adjusted in such a way that a person who is earning LESSER income ends up paying more than 10% his income, and person with higher income ends up paying LESS than 10% of his income. Such a tax is called as Regressive Tax (regressive wrt income).
If the taxes are adjusted in such a way that a person who is earning more income ends up paying more than 10% his income, and person with higher income end up paying less than 10% of his income. Such a tax is called as Progressive Tax (progressive tax wrt income).
In the same way, say GoI needs say Rs 10000cr as taxes. Say various members of the citizenry own properties whose total worth is Rs 10,00,000 cr. Now again, there are three ways to impose taxes —
One way is to impose a uniform tax of 1% of the property value. This would be a flat tax (flat wrt wealth owned).
Another way is to impose a tax in which those with lesser property will end up paying taxes which is higher % of their property value. This would be a Regressive tax (regressive wrt wealth)
Another way is to impose a tax in which those with higher property will end up paying taxes which are higher wrt their properties’ values. This would be a Progressive Tax (progressive wrt wealth)
25.3 Examples of regressive taxes in India
Now lets analyze some taxes in India.
Tax example-1 : Tax on movie tickets
Say a person earning Rs 3000/mo sees say 3 movies a month. Say he buys cheap tickets worth Rs 50. The tax in Ahmedabad on such tickets is Rs 20. So he pays (3 * Rs 20) = Rs 60/month as tax, which is 2% of his income. Now consider a person earning say Rs 30,000/mo. It is unlikely that he would be seeing 10 movies a month. Say he sees 4 movies a month, buy more expensive tax worth Rs 100, in which tax is Rs 40, and thus pays Rs 160/month as tax. The tax % will be = 160/30000*100% = 16/30 = 0.54%. Hence tax on movie tax is a regressive tax, regressive wrt income. What is more regressive is that in some cities of India like Ahmedabad, the tax on ordinary cinemas, where base price is Rs 20 and tax 80% of the base price. While for the expensive theatres (called Multiplex) where base price is Rs 100/- or even Rs 150/- or even Rs 400), the tax is barely Re 1/- per tax i.e. nearly zero !!! IOW, a person who can barely afford/spend to Rs 40 ends on movie ends up paying a tax of Rs. 15. While those spending Rs 100 to Rs 400 pay zero tax !!! This is truly a regressive tax wrt income — the kind of tax India’s elitemen and intellectuals love.
Tax example-2 : Taxes on tea
Consider 100cr citizens of India. Say some 60cr citizens drink tea. For the time being, ignore the remaining 40cr. Now I would divide these 60 cr tea addicts into 3 groups :
1. those who earn below Rs 100/day
2. those who earn Rs 100/day to Rs 1000/day
3. those who earn above Rs 1000/day
Now say a cup of tea uses say 10gm of tea which costs say Rs 2. Say the taxes on tea are 50% of the costs i.e. a cup of tea has tax of Rs 1. Now consider a person making Rs 100/day. Say he drinks 2 cups of tea. Hence he is paying Rs 2 as taxes i.e. 2% of his income. Now consider a person who is earning 10 times i.e. Rs 1000 per day. Obviously, such a person will not be drinking 10 cups of tea per day. Say he is drinking 5 cups of tea per day, in which case he will be paying Rs 5 as taxes i.e. 0.5% of his income as taxes. And likewise, a person who is earning Rs 10000/day will be perhaps spend say 0.05% as tea tax. So tax on tea is regressive wrt income of a person.
Tax example-3 : Taxes on tobacco, coffee, gutaka, beer
Consider tax on any such commodity, such as tobacco. Once again, say out 100cr citizens of India, say 40cr chew/smoke tobacco. I would divide the tobacco addicts into 3 groups
1. those who make below Rs 100/day
2. those who make between Rs 100/day and Rs 1000/day, and
3. those who make above Rs 1000/day.
Consider a person who is earning making Rs 100/day. Say he is chewing 10gm of tobacco on which tax is Rs 1. Obviously, those who earn 10 times i.e. Rs 1000/day are NOT likely to consume 10 times more tobacco. Perhaps they would be consuming 2-3 times more. Hence the individuals with lesser income are paying larger portion of their incomes on tobacco taxes. Hence taxes on all these commodities like coffee, tobacco etc are REGRESSIVE wrt income.
Quite often intellectuals cite taxes on tobacco as “welfare-oriented” i.e. taxes on tobacco reduce consumption of tobacco and thus improve the health of addicts. This is a flat lie and shows the extent to which intellectuals can twist fact to serve their wealthy masters. The reality is as following :
1. say a person earns Rs 100/day
2. say he eats tobacco, tea, coffee, sugar, oil etc, which costs Rs 20 before taxes
3. due ultra high taxes, the price of those goods is Rs 50
Now the increase of Rs 30 does NOT decrease his consumption of tobacco etc. Even with 2 to 3 fold increase in price, he continues to consume same amount. But due to higher expenditure, he ends up with LESSER money to buy good food like milk, ghee etc. And he is left with lesser money for his cloths, and he also has lesser money for his wife and kids, and may be his parents’ food, clothes and education. He also ends up with lesser money for their medicine. IOW, the regressive taxes on tobacco, tea etc DOES NOT reduce their consumption of these “bad items” but drastically reduces his consumption of “good items”. This not only ruins his and his family members’ lives, but deteriorate the whole economy. How? Since the person has lesser disposable income, he ceases to be consumer for a large number of goods. Hence the market for those goods shrink, which forces the manufacturer of those items to reduce production. This reduces the number of labor they can support and thus starts a negative cycle.
Effect of regressiveness in taxation
How this “gyaan” on type of taxes — flat, progressive and regressive — useful in understanding problems of India? The overall taxes in US/West are much less regressive than they are in India. As a result, the poverty problem is less severe in West, and the lower class in US/West has higher disposable incomes. So they have more money to buy various goods. This has created a large internal market in US/West for various manufactured goods and services. In addition, the lower class individuals in US/West also manage to save money to buy equipment needed to increase their productivity. While due to regressive taxes, the lower class individuals in India is hardly left with any money to buy that many goods or equipment. So the market in India remains small despite large population. And lower class individuals fail to buy equipment etc to raise their productivity.
25.4 Overview of proposed wealth tax on land/houses for Military
Tax of 1% of market value above 25 sq meters of non-agricultural land and 50 sq meters of construction space
Above the above limit, tax equal to 1% on the “market value” will apply
There are many issues – how to decide market value? What if one person has flat of 50 sqm? What if family of 4 has 1 flat of 200 sqm etc etc. The next section describe the answer.
25.5 Details of the proposed wealth tax on land/houses for Military
Senior officials
1. This wealth tax for Military will be implemented by “Tax Officer for Military” appointed by PM recallable by citizens
2. The PM will also appoint Registrar who is recallable by citizens
Registration of properties
3. If an individual owns a flat in a housing society, then land owned by him will be land owned by the housing society multiplied by % shares he owns in that society.
4. Each person/company with a land or house will register his property with the Registrar. The owner will also register its area, exact location and other details as asked by the Registrar (this is already done in most cities; most municipalities already have land/building records)
5. If the individual owns land below 25 sq meter and construction area is also below 50 sq meters, then tax due on him will be Rs 10 per sqmt of land and Rs 10 per construction area per year. The owner does need to fill the form disclosing purchase price , purchase date and year wise alterations he has made till date. No proofs for alterations will be required for alternations made before 4 years.
Registration of families, eligibility for becoming member of family
6. For the purpose of wealth tax, an individual can register himself as solitaire (alone) or part of family. which ever suits him best.
7. Family will consist of Head of the family, who can be male or female above 18 years of age.
8. The spouse of Head can become member of the family.
9. The children below 18 can become member of family with approval of both parents
10. If the children are above 18, they as well their spouses can still become member family if they have not registered their own separate families with wealth tax dept.
11. The parents and parents-in-law too can be member of the family unless they have separate families. And grand children of son as well as daughter can become member of family if both parents of the grand-child are members of the family.
12. The great grand children cannot become member of family
13. Unmarried or divorced siblings of the Head can be member of family, but married siblings cannot become member of the family. The sons and daughters of siblings of the Head cannot become member of the family
14. One person cannot be member of two families.
15. Persons registered as solitaire cannot be part of family.
16. If a person has more than 3 kids, only 2 can be part of family for wealth tax purposes.
17. If a person wants to form family for wealth tax person, he will need to register the family with list of members. The signature of adult members will be required and signature of parents of children will also be required.
Exemption
18. The exemption limit solitaire person will be 25 sq meter of land and 50 sq meter of construction, while that for family will be [25 + 20 * (number of family members-1) ] sq meter of land and [50 + 40 * (number of family members -1)] sq m of construction area
19. Exemption for senior citizen will be twice of the normal limit.
Classification of property – personal, semi-personal and impersonal
20. For the purpose of wealth tax, the owners can define the property as personal or impersonal or semi-personal depending on which valuation scheme suits him best.
21. If person is Solitaire, then a group of properties will qualify as personal if
o the property has no co-owner
o the sum of land area of properties is below 25 sqm
o the sum construction area of properties is below 50 sqm
22. If person is Head of the family, then a group of properties will qualify as personal if
o all owners of properties are family members, and none is outside the family
o every family member need not be owner
o sum of land area of properties is below [25 + 20 * (number of family members-1) ] sqm
o sum of construction areas is below [50 + 40 * (number of family members -1)] sqm
23. There can at most one semi-personal property per solitaire if it meets following requirement
o the solitaire person has not labeled any property as personal property
o he is the sole owner of the property
24. There can at most one semi-personal property for a family if it meets following requirement
o all owners of properties are family members, and none is outside the family
o not every family member should be owner
o the family has not labeled any property as personal property
25. The personal fraction in the property is ExemptionLimit/Area and impersonal fraction will be (1 – personal fraction)
26. The owner or Head can change the label on property from personal to impersonal to semi-personal any year.
Registration of properties’ values
27. For the purpose of the wealth tax, there will be two values of each property — standard value and circle rate (Jantri) value.
28. The standard value of a property will be (circle rate price at the time of purchase plus alterations made each year). The alterations will be as disclosed by the owner. The owner will not be required to provide any proof of alteration made, but must disclose the value of alteration made in the income tax statements as well.
29. The circle rate value of a property will be value based on unit rates of land and construction.
Tax on the land/house
30. The tax on properties which get labeled as personal properties will be Rs 10 per sqm per year
31. On impersonal properties, the tax rate will be 1% of higher of the two values – standard value and circle rate value
32. On semi-personal properties, the tax rate will be 1% of lower of the two values – standard value and circle rate value multiplied by impersonal fraction
On inability to pay taxes
33. If a person does not pay wealth tax, the tax will be due on the property and an 18% per year interest will apply
34. If the property is personal or semi-personal, then upon the death of the owner or sale of the property the taxes will be collected. There will be no confiscation
35. If the property is impersonal, the property will be auction when the due amount crosses 25% of the value of the property
Reducing double burden
36. Five times the amount paid in wealth tax in a given year will be deductible from the income of the next year while calculating income tax.
25.6 How does wealth tax reduced land hoarding and decreases value of land
Consider a person who has bought 10 flats for hoarding. Say each flat is worth Rs 20 lakhs. As per wealth tax law, he may be able to skip out 1 or 2 flats, but on the rest, he will have to pay 1% of Rs 1.60 cr as tax every year or pay
The wealth tax stops hoarding of the land and thus brings down the land prices. This lowers the cost of land for entrepreneurs and thus number of business increase, and so does employment. IOW, wealth tax does not discourage. And if at all it does damage to industries, it is far less than income tax or sales tax or excise.
25.7 How wealth tax increases growth and reduces unemployment
The wealth tax stops hoarding of the land and thus brings down the land prices. This lowers the cost of land for entrepreneurs and thus number of business increase, and so does employment. IOW, wealth tax does not discourage. And if at all it does damage to industries, it is far less than income tax or sales tax or excise.
25.8 Inheritance Tax
I support Inheritance and Gift Tax equal to highest marginal income tax rate. The highest marginal income tax rate I propose is 40% at income level of about 100 per-capita GDP. So highest inheritance and gift tax will be about 40% .
In the Inheritance tax, if the heir is widow or person above 60 or handicapped person, then 1 house of up to 100 sq. meter will be tax exempt and 50 per capita GDPs will be tax exempt. If the heir is able bodied, below 60 years and not widow then a sum of about 100 per capita GDPs will be tax exempt. Anything above that will attract inheritance tax of 20% to 40%.
25.9 Offering higher value to reduce use of black money in land purchases
Following is the Gazette draft I have proposed to reduce the use black money in land sales :
1. The rule will not apply on a flat when seller owns only one flat and buyer too has less than 1 flat and area of the flat is below 1500 sqft and price is same as circle rate. In such case, Collector shall not make any counter offer described in next clauses.
2. if anyone has purchased a plot\flat for Rs X, the details of the property and price will be put on the web next day
3. if within 30 days Collector (or officer deputed by him) can obtain that plot\flat by paying (1.15 * Rs X) to buyer
4. the Collector will make counter-offer if and only when a third party comes and gives offer of (1.20 * Rs X) to the Collector
5. if more than one buyer approach Collector, then the Collector will chose the buyer who offers highest price. Say bidder offers (1.20 + Y) * Rs X. Then buyer will get (1.15 * Rs X), the Collector will keep (0.05 + Y/2) * Rs X and the original seller will get (Y/2 * Rs. X)
The above proposed Gazette Notification is not unfair or forced sale. Because seller has sold the property, and it is yet to be transferred in the buyer’s name. So buyer has no rights over it as of yet. And the buyer is getting 25% extra in a short period of 30 days — no business can be so profitable. The clause-1 ensures that small buyers and small sellers will not face any difficulty.
How does this printing above clauses in the Gazette reduce use of black money in land deals? Say a plot is worth is Rs 10 crore. Today, such plots will go for Rs 4 crore white i.e. cheque and Rs 6 crores black (i.e. cash which will not be mentioned in the sale deed at all). Once above clauses are printed in the Gazette, such cash component will reduce. Why? Because if the officially disclosed price by buyer B will be Rs 4 crore, while market value is Rs 10 crore, then so many bidders will jump in and offer as high as Rs 10 crore. Now if someone makes offer of Rs 10 crores, then as per the proposed Gazette Notification, the Govt give Rs 4.60 crore cheque to the buyer and give the plot to the bidder. So the buyer would lose Rs 5.40 crores. So all in all, if any buyer gives cash more than 15%, of market price, he will stand to lose. So with this propose Gazette Notification, the use of cash i.e. black money will decrease in land sales. Now as time passes, the margin of 15% can be reduced to 10% for large open plots. The clause-1 ensures that small buyers-sellers will not face ANY delay or glitch. The large buyers, if they are paying the fair market price in cheque, then need not worry.
The total black money inside India is less than 10% of total white money. To give an estimate, total rupee in India, black plus white as on Nov-2011 is Rs 58,000 per citizen while total cash rupees are Rs 7500 per citizen. Now not all cash is black money. Say about half the cash is black money. Then black money is about Rs 3750 and this black/white ratio is (Rs 3750/Rs 54500) = 7%. IOW, only some 7% rupees are black and rest 93% are all white. So what creates mess is not quantum of black rupee, but the fact that black money is used in transactions such as land purchase, and that makes transactions more expensive for those who have all white money. Now the proposed Gazette Notification ensures that those who have black money cant use black money for land purchase. So the value of black money will decrease and so will its demand. The proposed law-draft will also reduce the land and thus flat\office prices and thus reduce the cost of production.
25.10 Customs
I at RRP propose 300% Customs Duty of which 1/3rd will go directly to the citizens. The direct payment to citizens is necessary to ensure that majority supports customs duty as also ensure that persons in-charge of customs are honestly collecting the duties. The customs duties are necessary to create manufacturing skills in Indian engineers, which is necessary to create Military Industrial Complex in India.
25.11 How can YOU help in improve Tax laws in India and make them less regressive?
Please read chap-13 of this book http://rahulmehta.com/301.htm . It has several steps where-in you can spend 6 hours a week and help to bring TCP draft in Gazette in India. The steps involve distributing pamphlets, informing citizens on motives of leaders such Congress MPs, BJP MPs, The Anna etc who oppose TCP draft, by giving newspaper ads, contesting elections. Once TCP gets printed in Gazette, using TCP, it will become easy for activists to get citizens opinion on following drafts – RTR PM, RTR Finance Minister, Wealth Tax draft, Inheritance Tax draft, reducing Income Tax, canceling Sale Tax and VAT, etc. This will make taxation simpler and less regressive.
25.12 Other changes in tax laws and drafts
In addition, we at MRCM party have proposed, demanded and promised some 200 changes in tax code. All changes are well defined, and specific. The drafts of the Govt Orders and Ordinances needed to bring these changes are given on http://www.rahulmehta.com/improve_taxation.htm
Review Questions
1. Consider India with 120cr citizens. Say only tax is wealth tax, for which one needs to have records of how much land/flats he possesses etc and how much alterations he did every year. Say list of alterations done take 2 page per dwelling on an average. How much is the paper work generated per years?
2. Consider India with 120cr citizens. Say only tax is sales tax , for which one needs to keep record of every sale and purchase. On an average, say a person makes 10 purchases a week. How much is the paper work generated per year?
3. In Sales Tax, tax can be completely evaded by not disclosing the sale. Can wealth tax be completely evaded by hiding wealth?
4. Will imposing wealth tax on land result into increase land/flat value or decrease land/flat value?
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