Tax the Super-Rich at A Higher Rate: Rangarajan

WAIT A WHILE: Tax innovations will have to wait till sentiment improves and economy is back on growth path, says the chairman of PM's economic advisory council

    CRangarajan, a key economic advisor to Prime Minister Manmohan Singh, has said the government could consider imposing a marginal tax rate higher than the current 30% on those with "substantially higher income", becoming the first Indian policymaker to contemplate higher taxes after the US raised taxes on the wealthy for the first time in two decades. "We must debate unconventional ideas. Fiscal deficit cannot be contained by curbing expenditure alone; we must raise revenue as well. We have to think of not just administering existing taxes better, but also of new ones. Why can't we think of having a rate of tax higher than the current peak of 30% on substantially higher incomes?" Rangarajan told ET in an interview. The veteran economist, a former RBI governor, also called for rethinking the current policy under which dividends were tax-free in the hands of investors, though companies pay a dividend distribution tax of 16%. In the conversation with this paper, Rangarajan questioned the logic of taxing dividends at a rate lower than the top marginal tax rate. 
But these leaps of taxing innovation, he cautioned, will have to wait till sentiment has revived and the economy has resumed its growth momentum. "I am not saying that we should rush in as sentiment is just now picking up, and we should not create a situation where what we have gained is lost. But at the same time, we need to look at the various possibilities of raising revenues," he said. 
India taxes income at three rates — 10%, 20% and 30% — though the actual top rate is higher, at around 33%, due to various surcharges. These rates were fixed in 1997 by Finance Minister P Chidambaram, who held the portfolio at the time. 
At a lecture to honour Raja Chelliah, a function presided over by Rangarajan, Chidambaram called for a debate on inheritance tax. 
Earlier this week, the US Congress voted for raising taxes on rich Americans, as part of the resolution of the crisis over the so-called fiscal cliff. The US legislation raises taxes on individuals earning more than $400,000 per year, and on couples earning more than $450,000.