GD Monday – “Tax rate for people earning more than a million rupees must be increased to 40%” – Week 5

We hope all of you are benefiting from our online GDs and taking home some valuable tips to apply them in the real time GDs that are soon to follow for most call getters! You can go through all the topics in the series over here.. You can share your views on the topic in the comments section.. (All the comments/views in the discussion are being rated on a scale of 10 by our experts, along with an explanation)

There is a large, cult group of high-income earning youngsters who believe in working hard and partying harder. That is to say – there is no dearth of disposable income among most 30-somethings in well-paying jobs. To each his own, certainly. But thinking about high-income earners from a taxation point of view – can the country benefit from this trend? Can the Government reduce its fiscal deficit by following a less conservative tax policy? Would the trickle-down effect improve? What kind of tax reforms do we need? Any advice for the Finance Minister before next month’s budget?

This is how it will work :

1) Users can post their arguments or views using their Twitter/Wordpress/OpenID accounts in the comments section below.

2) You can argue and counter-argue on the topic for the entire week.

3) The thread will be moderated by Prerna Lalwani a.k.a Peru to ensure the discussion is kept relevant and is not abusive.

4) On Saturday, experts and industry professionals at InsideIIM (all ex-IIM,XLRI,ISB only) will rate each argument on the thread on the scale of 10 with some guidance.

This cannot replace the experience of the actual GD but this exercise will surely help you shape your line of thought. While we may not be able to help you here with your delivery, we ensure that if you go through these next few weeks with us on this thread you will markedly improve your content. Hopefully, there will be more substance when you actually speak in a GD after going through this exercise.

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Comments

47 comments

Nitin

In the developing country of mixed economy where there is a vast difference between the daily wages of a poor household and a millionaire, there is need to redefine the tax slab and make it more balancing comparison to it existing form. Though, I am not agreeing with the flat 40% Income tax from the salary of those getting a million, but it should be some fixed component(30%) plus some varied component based on the exceeding salary the person getting from the base 1 million.

For example, if a person is getting salary of say 9 Lakhs per annum with the present income tax as 2.7 Lakhs, after getting a salary hike of 11.11%, he is about to pay 4 lakhs as the income tax. That means a deficit of 30 thousands per annum.

So, in my opinion, Income tax should consists of fixed plus variable components based on the salary you are getting instead of some flat rates.

@pradheep99

though we need to align with what Nitin has said, I would also like to provide an interesting stat that close to 75% of the total tax paid is obtained from the 10+% of people who have the said disposable income. That is more than 10L category… so it would not harm that we tax those people more.. But we should really may be keep a slap higher say 25L and more or 20L and More to have 40%. This way, the so called upper middle class will not get affected and the upper class of the society will give some of their money to government. Also, another point is to prevent so many exception clauses for the income tax. The tax structure should be simplified and all the loopholes should be blocked.

@deepalinaair

Hi, I wish you had started with the need for simplifying tax structure and built on that. Responding with more numbers and jumping to solutions won't help u score marks. U need to demonstrate understanding of basic concepts

Ankit

I think raising the tax rates for people earning above a certain threshold to a percentage as high as 40% isn't a pragmatic idea for two reasons. Firstly , Unfortunately there are numerous instances wherein people don't simply file IT returns and pay taxes , there are certain professions wherein incomes may be high but the money is routed through illegitimate means , or in the form of black money. Increasing the bar of taxes to 40% may lead to a certain section of economy (mostly the working class in upper management of organizations ), but it won't create any impact on those who simply flout the norms and don't pay taxes. Another reason is , 40% or even a number above 35% is too much given the fact almost services we use or things we purchase from our taxable income are further taxed under various taxes. It will look unfair for a certain section , although rich to be paying a greater percentage of its income to government as taxes. This can ultimately lead to people hiding their incomes above certain thresholds , and organizations paying people in the upper management in variable pays or in form of benefits to save them from taxes. This can infact lead to greater number of instances of tax flouting.

I believe, rather than over taxing the super rich , there should be a tighter control on everyone to pay taxes. Many individual businessmen who form a notorious section of people known to avoid taxes , should be bought to notice , ad whatever tax rates are there , should be implemented effectively.

uma

I second Ankit about the fact that increasing the slab rate will lead to excessive tax flouting.
Since the topic focuses on individuals aged around 30..limiting myself to them, I would like to emphasize on the common reasons why they have such well paid jobs. They will most probably represent expensive Alma mater and the amount of investment they put in for their college funding deserves the right to earn well. It happens with doctors also, they invest lakhs of rupees in studying, so they eventually feel the right to get back as much. But, in order to help the country from this excessive cash flow, I would suggest increasing the slab rate to 35 ( a compromise between 30 and 40) AFTER a couple of years of working with a slab rate of 30.
To elaborate , a person who has been working for a decade with a pay of 1 million will be paying 30% tax. But from his 11th year of work, he is liable to pay 35 percent.
Yes, its a very complicated solution but I think it satisfies both the tax payers concerns and helps the countries situation.
Plus if the country aims to improve deficit, then instead of concentrating on the younger generation which has just begun to earn money , it should eliminate black money by implementing the Jan Lokpal and get back the country's money from the older people who maintain Swiss bank accounts.

@deepalinaair

Uma, the topic does not necessarily refer to taxation as per age. However u r free to have any interpretation but our points are very focused on mba's and doctors but they are very small numbers in India so broad base your approach to an aspect which applies to masses.

@sharinggyan

Our country, unlike a lot of western countries, does not provide a lot of social benefits to the general public. Countries like France and Canda have a hig rate of taxation but at the same time provide facilites such as Employment Assistance, Medical benefits and much more. It then doesn't make sense to punish a selected few for earning more money by taxing them at 40%. Bringing down the deficit, while required, cannot be a reason to punish a selected few. France recently tried to do this with a 75% slab for those earning 1 million euros but it was rejected. We are a long way from having hig tax rates and must concentrate on ensuring the taxes are paid in time and by all.

@sharinggyan

Another point to not raise taxes for a selected few is that this section is already targeted for various other taxes such as luxury tax, service tax etc which is debatably one form of exploitation. As these taxes are already in place to increase the revenues, raisin the slab rate would be just cruel and may lead to people leaving the country. This would cause more harm than keeping the rates as they are now. Bridging the gap of rich and poor and reducing the fiscal deficit should be done by growt, employment opportunities and economic development and not such piecemeal approach

Priyanka

The primary challenge before the government is to reduce the fiscal deficit. To achieve this, the government can either shore up collections or cut expenditures.As pointed out in earlier comments, shoring up of tax collections through increase of tax rates may not be the sound approach as it may increase incidednces of tax avoidance. the biggest example of this is before us when a well known french actor took Russian Citizenship to avoid higher taxes in home country. To avoid such practices in India, firstly the government must make efforts to simplify the tax laws to increase compliance thereby bringing a mmore people under the tax net. Further government must also look at increasing the indirect tax collections through efffective implmentation of Goods and services tax.

@deepalinaair

Good. But larger topics mentioned by you should be the heroes such as
1. Reduction of fiscal deficit
2. Simplifying tax laws
3. Indirect taxation

Anand

Income Tax is an important part of the Indian economy. And yes, more needs to be collected. Increasing the tax rate to 40% is a solution. But, this will only move people away from filing taxes. WIth less than 3% of the population filing income tax, adding a new slab to the existing tax structure makes the complex but not effective. What we need is efficient functioning of the current system.

Hari

In addition to what ankit said, imposing 40% tax for people earning more than a million may lead to millionaire flight which means they may flee to other countries to escape heavy taxes. This phenomenon was observed during 1970's when british govt., imposed heavy taxes on high income groups. This may also result in fall in the investments made in India.

Rahul Jain

I do agree with Hari, in addition I would like to bring to your attention a concept of "Right to Equality" in the Indian Constitution. Are these words there in the Constitution just for namesake? Just because a person earns a million dollars, why should be charged with 40% tax in comparison to other begin charged 30% tax? I would say instead to increasing the tax, the government should rather make more stringent rules for Corporate Social Responsibility. This will not only benefit the common people but the world will become aware of their social responsibilities.

Lakshmi Rajagopalan

In my opinion, taxing too much can lead to frustration among the high earning group, leading to their seeking some other country's citizenship as others have already pointed out.
Plainly taxing people based on their income is also not effective. A person could be the only earning member in his family. He might have sick parents to take care of(an operation today costs from 2L to 25L) and may have many dependents. Though the govt. announced many tax rebate, all medical/family expenditures are not taken into consideration.
My suggestion is that we tax luxury products still more. Not all high income group spend lavishly. Our previous generations saved most of their income. The govt. themselves made it compulsory that they save a larger part of their income. These savings helped them in the later stages of their life. Their investments in land were also beneficial(look at the prices of a piece of land now). The responsibility they held for their daughter's or sister's marriage made them invest in gold(this gets passed on through generations from grandmother to mother to daughter). However, this was also taxed under wealth tax. As a result, people started spending the amt(which is anyway going to be taxed) on luxury items.
Nowadays, the IT companies in order to lure more people, hand over the entire salary and don't insist on saving. As a result on having such huge amt in hand and also with the influence of the western world, we spend most of our income in luxury products, disco, etc. Now, even the people who earn less don't want to be bereft of these things. They spend more than they can afford, compromising on basic necessities such as quality of food. This also leads to demands that the govt. offer free rice or rice at Rs 2/kg (I am from TN, so analyzed the situation here)
If we tax the luxury items more, we can use it for nation building as well as help people below the poverty line, thereby slowing bridging the gap between the rich and the poor. Meanwhile within a span of few years, people will reduce their spending on these items and save more. This will instill in them a responsibility to save for their posterity.

insideiim

Have you heard of a term Employee Provident Fund? If not, please Google. Your statement "The IT companies in order to lure more people, hand over the entire salary and don't insist on saving" makes very little sense and reeks of ignorance.

The only point you have made is about taxing luxury items again and again. Also, people who spend on luxury items do not ask for Rs.2/Kg rice so tha they can spend more on luxury items/disco.

"an operation today costs from 2L to 25L" – Again an irrelevant point. Medical Insurance is another term you need to Google.

Also substantiate your claim of tax more luxury items with data. What is the size of the luxury market in India? What are luxury items? How much will the government earn by taxing it?

Surya

I have noticed that a few have argued against the idea by suggesting the possible fallouts. But strictly limiting myself to the subject of increasing taxes on the super rich, I am definitely in favour of it.
With rising population (and social schemes) the country's burden on sustaining the expenses on social infrastructure in ever-increasing. This can only mean two things: a cut down on the expenditure, or an increase of revenue. Arguing for any reduction in the social outgo is untenable given the country's weak performance on social indices–Health indicators, Quality-of-life indicators etc. And it is the widening Vertical inequity–the dichotomy between the rich and the poor–that makes a case for increasing taxes.
Saying that pushing up tax rates will serve as a disincentive to work or invest is without truth. As long as we ensure that earning more will result in more income in hand, there is no reason to believe that higher taxes deter investment.
But the fears of capital flight to tax havens in not unfounded. Countries which demand minor sums in taxes do appear better destinations to park one's monies. However, it should not be forgotten that there are ways to stem this possibility. So, more taxes needn't result in more evasion.
Legitimate tax-avoidance can be a channel to explore. Ways of routing incomes to financial markets with the upside of lowering taxable income are already in place. These means can be leveraged to reduce government spending even as projects continue to flourish.
Although usurious tax rates are unconstitutional, rates commensurate with the incomes of people aren't. Moreover, it must be the rich who should pave the way to a more egalitarian society.

insideiim

A good balanced view. But substantiate with data to give yourself the edge over your competitors. But a good show overall. The point on "Legitimate tax-avoidance" was interesting and something new.

abhi

India is one of the fastest developing economies which is facing high financial imbalances.A country to have an all round development it should have enough resources and income.TAX is the main income source of a country,which is used for the development and progress.Increase the tax to a high extent of 40 % is not acceptable at once. There are many individuals , private firms which earn in large amounts but manipulate to avoid TAX. Government has to work on the Assets , properties ,earnings , trusts , high salaried and various high economic parties to make them pay tax accordingly . The government should have a variable TAX rule for various parties which can be considerable and both wsay beneficial.

Anand

As everyone agrees more tax needs to be collected, we need to first evaluate the current tax system. There are several allowances in the system. One for example is section 80C, where we can reduce the net taxable income by a maximum of 1Lakh if we are to invest this money in an insurance. Also, taxable income can be reduced by donations to charitable trusts and this has been happening in India. The problem with this idea is that the person instead of paying taxes can start his own charitable trust which does not pay any tax. This way, the money stays with the trust and he can use the trust to do what he wants. Our FM Mr P Chidambram has acknowledged that very less people file income tax. Infact, less than 15 Lakh people have filed income tax of 10L+. In a country of 120+ crores, with most in the working age group, this number is extremely low. What we need to do is educate people on the importance of income tax. There should be methods to check income tax violations. More investments should be made to improve the income tax department.
Increasing the tax rate to 40% can be a compromise. What we need is a solution and not a compromise which may work in paper. This only means accepting that we have made the most out of the current tax system.

insideiim

Your points are limited but you've presented them well. Even if all your stats are not correct, it is a good way to put across a point . An argument backed with data.

"What we need is a solution and not a compromise which may work in paper. This only means accepting that we have made the most out of the current tax system." – This line was completely unnecessary and takes the sheen off your earlier content

Anirban

I think that the current tax rates slabs are appropriately set and increasing it to 40% is not going to solve our problems of fiscal deficit etc. As rightly pointed out by the moderator in the case that a major portion of the high income bracket consists of people in their 30s and late 20s many of whom may have landed such incomes after investing a good amount of hardwork and money in premier B schools or Engg and Medical colleges etc. So it would only be unfair to rob them of what they deserve by setting higher tax rates. Instead the govt should start at curbing corruption from all levels of society, and also make sure that citizens pay taxes in time. The government should also take stringent measures to make sure that many notorious business-man etc. who dont file taxes actually comply with the rules. If taxes were to rise, it would also result in many citizens leaving the country and becoming citizens of other countries. Also maybe the government can think about bringing back black money from Switzerland.

Jay

First of all, indian economy is growing at a fast pace. At this juncture, in order to sustain and support the rate of growth and to have an inclusive growth, india need to invest heavily in infrastructure, public healthcare, education sectors. Besides, it has a large burden of diesel,LPG,fertilizer subsidies.It has already taken many actions to contain the fiscal deficit such as disinvestment, public private partnership , increment in diesel prices, capping off the number of LPG cylinders so on and so forth.These steps were taken to cut the spending and consolidate the economy.But still it is well short of target of containing the fiscal deficit to 5.1% of GDP. It necessitates mopping up of tax collections – direct and indirect taxes.
Now coming to the question of increasing the tax rate to 40% for high earning individuals , the limit of 1 million rupees may be debatable.However,the government has already imposed an additional service tax of 12.3% on film and television actor apart from income tax. It could be argued that the mark could be higher or tax may be based upon the joint family income(As in the current US taxation system) which could be 15 lakh or 20 lakh+ .But the main concern here is the proportion of people or family in the tax bracket which is significantly lower and will be in decimals. So, this may not garner a significant amount for the government. But this step coupled with strict compliance of the taxation in other tax slabs could increase the collection to a significant amount. Still, there are many people who evade the taxes through illegal means and could be brought under the tax net.The argument that people will leave the country just because of little higher taxes is exaggerated because people can not afford to leave their profitable businesses and lucrative jobs at the point when people from other countries are keen to get a pie of the growing indian economy.

insideiim

Decent approach. Seems to have a line of reasoning. "But the main concern here is the proportion of people or family in the tax bracket which is significantly lower and will be in decimals." – Dont make such statements if possible. State the number if you know otherwise dont make a guess like 'must be in decimals'. Overall a good show

Nishtha Kaura

I am in total agreement that imposing 40% tax on high income earning group is not an effective solution to our fiscal deficit problem as it would lead to a drastic increase in people evading taxes. Also we shouldn't forget an important point that these high earning youngsters are the same people who spend on high end luxury items and indirectly impact the country's indirect taxes.An increase in direct tax leverage would not only curb consumer spending but also discourage foreign retailers from investing in India.So a smarter way to earn more tax is increasing services and goods tax on these luxury goods instead and make stringent laws and rules to ensure less tax evasion overall. Government should focus more on providing basic amenities like food,sanitation,better infrastructure and a more stronger judicial system so as to regain their citizens trust and a belief that the taxes being payed by them are put to use for the society's benefit.

insideiim

Mostly repeat. Brings nothing new. One suggestion for you could be that you speak as early as possible in the GD.

vijay

I believe that slab based income tax in India should be abolished. The reason being that such a system is the root cause of a many anti national activities like tax evasion and the resulting black money. This is because in a country like india where the public money is primarly focussed towards the upliftment of the poor, the rich dont dont have the incentive to pay their hard earned money as higher income tax. What i suggest is differential sales tax on luxury items that the rich consider a necessity. A uniform income tax code can reduce the amount of money deposited in swiss banks and ensure that the rich spend it here. This will also help the indian economy to grow further

insideiim

The point on luxury items has been visited again and again. So you are also a repeater. Please explain how a uniform income tax code will reduce tax evasion with some global example. Whats the basis of your argument?

Sid

The recent report by the Kelkar committee which gauged the financial situation of the country has indicated the the tax to GDP ratio target for this fiscal of 10.6 % might not be met if the government does not act to reduce the fiscal deficit. Noted economists, Jayati Ghosh and CP Chandrashekhar, have pointed that the expenditure of the governement for the last three years has approximately been constant. They have argued that there is a need to increase the receipts by the government. Alos, the government has admitted in the parliament that tax to the tune of 60,000 crore rupees cannot be recovered.
In view of these developments, there is an urgent need to increase the tax receipts by the government to reduce the fiscal deficit. One of the ways to do so is by taxing the high income band, this band may start from 2 million rupees or more. This would help augment the tax to gdp ratio. Also, most of the subsidies ( fuel and food) are targeted for those whose incomes are on the lower sides. Given the rising inflation and persistent lower incomes, it would be incorrect to eliminate these subsidies.
But, the increase in the taxes should not be done without improving the tax compliance monitoring mechanisms. Without, improving the monitoring mechanism there can be an increase in the cases of tax evasion. Other moves such as the Direct Tax code and Goods and Service Tax must also be implemented along with the new tax regime. All these measures collectively will help reduce the fiscal deficit.

insideiim

Good approach. Citing Kelkar committee will always give you more points. In general a balanced argument with well thought reasoning. At least you are thinking. Good show.

Sujit

I will not go in favor of 40% hike in income tax. We have to realize there are different class of societies with earning more than the given range. But at the same time, we have to also realize that what is the reason they are getting paid that much high. A higher position may give you that money. But to reach at that higher position one has to spend a lot of money in current scenario for career building. As we all know how expensive now education is.
Instead making slabs for different income groups, we have to make a same percentage for everyone. Still this is not the whole story. At the same time government should provide the same level of benefit to all the individuals. Money should not speak at government related services.
We have to also note that, all the hard earned money are given as tax to government for economic development of country as well as social development. Instead of getting the real benefit of those money, it is redirected in some ways and resulted in different types of scam.
Don't you think it should not happen.

insideiim

"A higher position may give you that money. But to reach at that higher position one has to spend a lot of money in current scenario for career building." – You will get butchered in your interview if you make such statements. What is the basis to make such a statement. Overall content is quite bad.

Himanshu Gupta

Though we all know that there is a need to decrease the fiscal deficit but increasing the tax rate is not the way to do it. At a time when the investors confidence in the government's economic policy is shaken, increasing the taxes will only lead to more bad news for the economy.
This will also lead to decrease in investment and this a slower GDP growth. Instead, if the govt. focuses on trapping the high net indiv. who are still avoiding the tax payments, it will help in reducing the fiscal deficit as well as not harm the investment environment in the country. More ever, as we have seen in countries where the tax rate has been increased like in France, the high income individuals tend to apply for citizenship of other countries which will hurt the economy even more.

insideiim

Mostly repeat of points. Brings nothing new to the table. Please speak early in a live GD if you have limited points

Viky

It is not a good idea to have a tax rate of flat 40% to those who earns above 1 million. There must be a fixed and a variable component in it. Without variable component, it does not make sense to claim that our government is collecting taxes equally across different working groups. In India, we have a structure where in there is a fixed component that varies across different income levels. That is, we collect less % from a low working group and a high % component from a high working group. This is based on an idea that high working individuals will be able to contribute more to the country even after satisfying his own set of needs. But a low earning individual does not have sufficient income to satisfy his needs completely. So, less tax is collected from them. And it is very subjective to decide upon the upper limit of any one's needs and hence, the money needed for his own needs. Thus, a flat structure would ruin the current system of tax collection based on affordability level as estimated by the government.

insideiim

Your understanding of tax system in India is questionable. There is no mention of a flat tax rate. You are sure to score very low marks as you have not done your basic homework.

Prince Doshi

Just imagine urself in a situation when u have to pay tax @ 40%?Will u pay?Already people are crippling over the fact that the taxes paid by them, if any, are in no ways yielding appropriate returns from the govt.Therefore, the idea to enhance the tax rates won't work and will definitely lead to increasing black money. The better way wud be to maintain the tax rates (10%, 20%, 30%) but increase the basic exemption limit and further slab rates, to encourage more and more people to disclose their income even if it does not result in payment of taxes. The benefit is that more money will come into the economy reducing the existing black market which will subsequently lead to payment of taxes. Infact I wud suggest more tax saving investment options for those falling in the 30% bracket to encourage them to offer more income to tax. People in the 10% & 20% wud also be encouraged to move into the 30% bracket because of this incentive. Additionally, from a govt's perspective, its always indirect taxes that contribute more to their revenues then direct taxes & providing a reason to the taxpayers to avoid more tax wud further lead to fiscal deficit resulting in inflation and other economic problems.

@Sharmankit10

India is a country with more than 1.2 billion residents and not more than 55-60% of the people actually pay taxes.Out of these 55-60% the majority resorts to various measures to evade taxes.History has shown that taxes collected have risen with widening of the tax bracket and not the slab.I think the current tax slabs should be modified to incorporate the growing middle class with an annual income of 5 lakhs-25 lakhs. The tax structure should be such wherein they are relatively more willing to pay taxes.Something like 10-12% for the above mentioned category,12-15% for the people with 25 lakhs-50 lakhs and flat 20% for people with income beyond 50 lakhs. This would to a great ensure that people are relatively more transparent in the dealings.Else tax evasion would become very rampant leading to further troubles for the government.
Also the super rich are wealthy enough to hire best of CA's and park their money in tax saving options which is beyond the reach of a common man.They also have the option of parking their money in safe havens abroad.To sum up i would like to say that not the rate but widening of the tax base that should be looked at to increase the flow of taxes.

Rocker

Increasing the taxes fro rich people will encourage them to evade the taxes and they will be less enthused to work more efficiently and increase productivity since if they earn more the more they would have to pay as tax.
Increasing taxes for rich means govt is short of funds due to inefficient bureaucracies.
It will violate the principle of equality, everyone should be given a fair treatment. rich people hardly use any govt social service then ehy should they pay more?

What we can do is to introduce a fair tax say if the person;s income constitutes 10% of all income then he should give 10% tax and so on.

rahul agarwal

I think the government should not raise the income tax at all. Modifying the slab will play a little role.The Indian citizens already pay a lot of tax in several ways, ie, we buy a bike or a car and it has several taxes. Then we pay road tax as well. We pay income tax. We pay wealth tax. We pay VAT. We buy any electronics item and pay tax. In import and export, we pay tax. We pay customs. We pay a lot of tax.
The government's focus should be on Black Money. Billions of $ disappear as black money every year. Increasing tax will result in an increase in all these incidents only. We should leave the slab as it is and spread awareness and collect the tax that is entitled to come to the exchequer but is not coming to it. We must design ways to limit and reduce the black money. Converting the black money into white will solve most of the financial problems of the government and there will be no need felt to increase the income tax.

Ravi

Hello friends,

In my point of view,it is the good and necessary step as the bulk part of money is accumulated within 5 % of indian affluent people. So if any such modification in income tax rule will be made, it would be good for our economy and the government can utilise those extra generated income in reducing inflation and in developing basic infrastructure like hospitals,schools in rural areas where there is no such facilities.