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3 new taxes that Modi government could introduce, but won't
January, 31st 2017

Our tax to GDP ratio is abysmally low at just 16.6%, which is much lower than the emerging market average of 21% and OECD (comprising largely of rich countries) of 34%. This isn't surprising, less than 1% of India's billion plus population pays Income-tax (I-T) and only 3 crore I-T returns were filed for the financial year (FY) 2015-16. Various committees down the years have advocated widening of the tax base. Here are top three potential avenues, which could be explored.

1 Tax the super rich farmer
Over the past decade, according to data given by Ministry of agriculture, the GDP from agricultural activities has increased from Rs 8.2 lakh crore to Rs 16 lakh crore in FY 201516. While fragmentation is rampant in the agricultural sector and many farmers, even if taxed, would fall below the Income-tax (I-T) exemption limit of Rs 2.5 lakh, there is still scope for garnering tax from the super rich farmers.

Let us take a more precise figure. As reported by TOI earlier -in its edition dated March 13, 2016 -there are thousands of individuals declaring an agricultural income of over Rs 1 crore each. During the nine-year period from financial year 2006-07 up to 2014-15, the number of cases with Rs 1 croreplus agricultural income was 2,746. For the financial year 2014-15, 307 such cases existed. CBDT asked its ground level officers to examine these cases and also detect any errors which may have crept into the I-T returns when declaring agricultural income. A PIL is pending in the Patna High Court, which points to the rampant misuse of tax-free agricultural income.

Mind you, these are statistics of agricultural income based on I-T returns filed, there may be many more cases of crorepati farmers who have not filed their I-T returns.

How much can govt get? Assuming profit from agricultural income to be 5% of the GDP of Rs 16 lakh crore, we arrive at profit of Rs 80,000 crore. If such profit is subject to tax at the lowest slab of 10% (assuming that all farmers would not fall in the highest tax slab), the government can get Rs 8,000 crore Or, let's just focus on crorepati farmers. Assuming that each of the 307 crorepati farmers, who filed their I-T returns during 2014-15 earned only Rs 1 crore each and not more.It works out to an agricultural income of at least Rs 300 crore. Tax at a flat rate of 10% would fetch government Rs 30 crore.

Suggestion: Parthasarathi Shome-led committee on Tax Administration Reforms in its report (2014) had suggested bringing large farmers having income above a higher threshold limit, say Rs 50 lakh into the I-T net.

Budget 2016, introduced a flat rate tax on dividend income for rich shareholders. Dividend income is no longer tax free for those shareholders earning dividends of Rs 10 lakh or more.Likewise, a case can be made out for taxing crorepati farmers, earning more than Rs 1 crore at a flat rate of 10%. Or the agricultural income threshold can even be lower as suggested by the committee.

This will require both a constitutional change (as agricultural income is a state subject) and a political to be a reality.

2 Legalise gambling & betting and tax it
The gambling industry is booming despite it being largely illegal. All forms of gambling except horse racing, rummy and lotteries are banned in India, with some state specific exceptions -such as casinos in Goa. As per an industry report, the betting market in India is worth Rs 3 lakh crore approximately (this includes betting of all kinds including betting on cricket matches, which is a large chunk).

According to news reports, on an average, bets worth Rs 1,300 crore are placed when the Indian team plays an ODI cricket match. In 2015, the Indian team played 21 ODIs, which bring the betting figure to Rs 27,300 crore. Every IPL match adds as much as Rs 530 crore to the domestic illegal betting pool. On this basis, given that 60 IPL matches were played during 2015, the total betting amount aggregates to Rs 31,800 crore.

How much can govt get? According to the industry report, if the Rs 3 lakh crore gambling market is legalised, the government could garner Rs 12,000 -19,000 crore a year from taxes.

Or, the government could make a start with India's most popular sport, cricket. Given the aggregate betting figure of Rs 59,100 crore and a basic tax rate of 30% the tax could be Rs 17,730 crore.

Suggestion:
Many countries are earning tax from gambling activities (see chart).Legalising cricket betting was recommended by the Justice R N Lodha committee appointed by the Supreme Court to investigate the IPL match fixing scandal which rocked the country in 2013. In addition to brining in revenue, legalising gambling and betting will also crack down on money laundering operations.

3 Estate Duty is gaining ground world over, but...
Estate Duty is also referred to as Inheritance Tax or Death Tax and it exists in many countries across the world. Simply put, Estate Duty is a tax on the value of the property left behind by a deceased person to his heirs. In India, Estate Duty was payable under the Estate Duty Act, 1953.This Act was finally abolished in March 1985. It was a complex law riddled with different valuation rules for different kinds of property, thus it gave rise to a host of litigation and the collections were not commensurate with the cost of administration of this tax.

When estate duties existed, estates valued at over Rs 20 lakh, attracted a high duty of 85%. For the 198485, it garnered Rs 20 crore (which was 0.4% of the total direct tax collection in that year).

How much can govt get? Direct tax collections for 2015 rect tax collections for 201516 were Rs 14.6 lakh crore.Assuming the collection ratio remains unchanged at 0.4%, it works out to a collection of Rs 5,840 crore.

Suggestion: India must not be hasty in reintroducing estate tax for several reasons. A fair share of Indian business entities are family run. Introduction of estate duties will impede economic growth and could result in cessation by Indian promoters of their India residential status. Business operations could also move overseas. If at all, at some time in the future, India decides to walk down this path, exemptions must be carved out -such as for residential houses. The basic exemption limit must also be quite high -such as, in the US, it is $5.45 million, which translates into Rs 36.8 crore per person.

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