Sucheta Dalal :Top tax payers
Sucheta Dalal

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Top tax payers  

Jan 29, 2006

Has anyone wondered why the list of highest tax payers in the country is packed with filmstars? Or, that the highest tax payer (Amitabh Bachchan with an income of Rs 19 crore) and other actors in the list dutifully forked out a third of their income to the government? Actors pack the list of high tax payers, not because their earnings are the highest in the country, but because they have few tax breaks. In fact, the government extracts all it can from actors in their short career of high earnings and fame. In contrast, companies and traders have successfully lobbied for minimal tax payments. Stock market traders and investors do not figure in the list of top tax payers anymore, despite vast trading volumes and incomes that runs into hundreds of crore rupees, because they pay an insignificant Securities Transaction Tax (STT). If they hold shares for less than a year, the capital gains tax applicable is only 10 per cent. For more than one year, capital gains tax is zero. For futures trading, a speculative product, income is treated not as a speculative but as a normal income. The zero tax on long-term gains is a big boon for corporate India as senior employees are beginning to hold hefty stock options. In some of India’s most high-profile companies, at least a dozen top employees are each worth over a mind-boggling Rs 100 crore plus. Some leading professional bankers are worth over Rs 300 crore. Even when they sell tiny lots of shares to enjoy their wealth, they pay no capital gains tax. Yet, their high earning potential does not span just a decade or so, nor depend on a fickle fan following. This lopsided tax system has developed because the government wanted foreign portfolio investors to have same tax benefits there were being extended by other emerging countries. Over time, taxes for domestic investors were reduced to create a level playing field.


STT bonanza


The tiny STT of 0.02 per cent has turned into a better-than-expected bonanza for Indian business. Traders, speculators and investors pay minimal tax on their short-term trades and none on derivatives, but the insignificance of the tax makes it an attractive conduit for laundering unaccounted income. As if that were not enough, corporate India is constantly lobbying for permission to route all kinds of M&As, reverse IPOs and other transactions through exchanges in order to avoid capital gains. The massive Reliance demerger deal also escaped capital gains tax for the Ambani brothers by routing all trades through the stock exchange in the form of massive bulk deals. Additionally, banks often collude with tax evaders to route crores of rupees through the banking system by ignoring Know Your Customer (KYC) rules. Put all these together and you have the answer to low tax collections in India. The FM then goes about concocting new taxes in every budget to extract more money out of the same class of high tax payers like film actors.


Anchor or Actor


Since many of the wealthiest Indians pay very little tax on the largest component of their wealth (which is held in the form of stock options or investments), one would expect that the Income Tax department to have a lot more respect for those who top their tax-payers list by coughing up the maximum tax. Instead, you have the ugly spectacle of the department going after its highest tax-payer, Amitabh Bachchan, even while he was battling for life in hospital. In an attempt to squeeze out even more tax from the superstar, the department wants him to clarify whether his status in the game show ‘KBC’ is that of an actor or an anchor. The FM’s clarification regarding the timing of the tax notices did little to dismiss the impression that the action was part of political vendetta. Especially since the same department doesn’t show similar zeal in tracking Ketan Parekh’s source of income, even as he pays Rs 169 crore to Madhavpura Mercantile after he was barred from being associated with the capital market ‘‘in any manner’’ for 14 years.


No. 3 accounts


Now that the RBI is cracking down on banks violating the Know Your Customer (KYC) rules, banks are worried about how to turn down demands to open ‘‘No. 3 Accounts’’ or face the consequences. It is fairly well accepted across India that ‘‘No. 1’’ accounts refer to the official or legal accounts of an individual or business and ‘‘No. 2’’ accounts refer to those used to stash unaccounted earnings. What are ‘‘No. 3’’ accounts? A leading private banker explains that these accounts are peculiar to South India and refer to ‘‘benami’’ accounts that are opened on behalf of powerful politicians. But the powerful beneficial ownership is made known to the bankers so that they ask no questions about funds moving in and out of those accounts


-- Sucheta Dalal