Incentivising Accelerated Growth
Budget 2023-24 has the opportunity to make the Indian tax regime globally competitive, settle deep-rooted taxation issues, and provide the Indian citizenry incentives towards accelerated growth, wealth creation and job creation.
India is today the fifth-largest economy globally and third in purchasing power parity. The economy has recovered strongly from the effects of the pandemic. Advance estimates of the FY23 nominal GDP stand at Rs 273 lakh crore. The economy could grow by 6-7 per cent in real terms and 11-12 per cent in nominal terms in FY24 translating to around Rs 32 lakh crore in added GDP, a significant amount.
Buoyant Tax Revenues
Tax revenues are doing exceptionally well and may exceed the Rs 28 lakh crore budgetary estimates (BE) to reach an estimated Rs 32-33 lakh crore in FY23. Tax buoyancy occurred in FY22 as well when revenues exceeded BE by Rs 5 lakh crore. Continued tax buoyancy in FY 24 could increase revenues to Rs 37-38 lakh crore.
With Budget 2023-24, the government must seize the opportunity to resolve persistent taxation issues. Income tax (IT) rates have remained almost constant for some time despite high inflation. The current IT structure is teeming with deductions for housing, savings, interest, etc., aimed at individuals aged 25-55 who are saving for the future. This structure is of little use for people aged above 55 and retirees. Now, expectations are high that the government will streamline the tax slabs with something like no tax on income up to Rs 5 lakh; 10 per cent tax for the Rs 5-10 lakh bracket; 20 per cent for Rs 10-20 lakh; 30 per cent for above Rs 20 lakh; and a nominal surcharge of 12 per cent above that. The rearrangement will simplify the tax structure and do away with all exemptions except 80G for donations and 80D for health insurance. This can be offered as an alternative, and the government can evaluate the new structure's utility by comparing its adoption rate with the existing structure's retention rate.
Surcharges Must be Abolished
In particular, surcharges which take the tax rate to a significant 43 per cent must be done away with, as excessive taxation has led to a disturbing exodus of HNIs from India (source: Visual Capitalist). India is among the top 10 countries worldwide for millionaire emigration, losing the third-largest number of wealthy people at 8,000-plus in 2022, reportedly 2 per cent of India's HNIs. Many emigrate to Dubai, Singapore, and other regions with favourable business and tax climates to save and invest in. In conversation, these HNIs reveal that often the reason to relocate their investment offices is an uncertain business environment in India jointly caused by the exercising of arbitrary powers by tax authorities, a lack of judicial focus and clarity, and lengthy, drawn-out investigations by investigative agencies, often without adequate basis or evidence, in addition to the excessive taxation.
Specifically, while the budget speech stated that the surcharge would be applicable only over the threshold amount, the ensuing law made it applicable over the entire income, not just above the threshold. This creates an unnecessary tax burden. Budget 2023-24 must set this right by applying the nominal surcharge only on the income above the threshold.
Flight of Wealth Creators
The government must, indeed, enquire into and thoroughly investigate why so many Indian wealth creators are leaving and take steps to ensure none of the tax and investigative authorities is responsible for the emigration. Every high net-worth family domiciling elsewhere means a consumption loss of Rs 3-5 crore/year/family (multiplying this by the 8,000 HNIs who emigrated in 2022 amounts to a significant loss of Rs 24,000-40,000 crore to the country), and loss of income as they build overseas assets and pay taxes in a more favourable business environment. They will tend to build a global portfolio instead of investing in India. HNW families also tend to provide the largest number of jobs.
With the rise of India’s startup ecosystem and many founders becoming HNIs, it is imperative to fix these issues immediately. Startup founders are already domiciling elsewhere to avoid the problems prevalent in India. Investigative agencies like IT, CBI and ED are quick to launch raids and give undue publicity to it, and then the ensuing matter crawls at a snail's pace if that is challenged. In India, excessive publicity like this damages the reputation of the people at the receiving end.
Tax Terrorism a Big Worry
Tackling tax terrorism is one of the NDA government's few unresolved significant promises. The trend of tax officials making high tax assessments which are then reduced or overturned in tribunals or courts is worrisome and stems from a long-standing system of assigning annual tax collection targets. Budget documents show Rs 12 lakh crore worth of tax disputes are pending, compared to Rs 4.5 lakh crore in 2014. It remains a significant issue, resulting in a waste of taxpayer money and time, as well as the courts' time, and impairs India's ease of doing business.
India must strive to protect and maintain individuals with legitimate wealth creation while identifying and appropriately dealing with individuals with illegitimate wealth creation. The rule of law must always prevail. The nation must invest in the tools and capabilities of the investigative agencies, train them in using these, and institute the necessary processes and judicial capacity to execute speedy investigations. Once a matter is opened, it must be closed within a reasonable period without unnecessarily hurting citizens' rights and reputations.
Budget 2023-24 comes at the tail end of a successful decade of governance. The NDA government has boldly tackled two major issues in India – delivering development to the aam aadmi and speeding up infrastructure connectivity. By focusing on removing the barriers to wealth creation, the government will open up multiple new avenues towards large-scale job creation, innovation and domestic consumption that will propel India over the coming decades.
TV Mohandas Pai is Chairman, Aarin Capital & Nisha Holla is Technology Fellow, C-CAMP
