Thank you Mr Finance Minister for accepting my suggestion on raising the exemption limit, though only partially. If you return as the FM after the elections, here is a comprehensive direct tax reform plan for your next budget. By Vivek Sharma

Dear Mr Chidambaram,
I must admit that when I wrote to you last December, and again more recently, I was not very hopeful that you would be receptive to my sob stories, observations and suggestions.

After all, average urban taxpayers like me are not quite the major constituency for you and your government. Yes, I know, it is not your fault. This whole business of aam aadmi politics was forced upon the uncorrupted reformer that you are. Those stubborn communists, who you can't afford to ignore, just refused to buy the reform argument even from an erudite and persuasive lawyer like you. No, it's not your fault.

In my last week's article (See: Farm loan waiver - mother of all moral hazards), I was a bit annoyed with you on your flagship farm loan waiver plan. I know it was literally thrust upon you and you didn't have much of a choice. As you know, my real problem with the plan is not the moral hazard. My real complaint is that you are wasting my money!

If I weren't a taxpayer, I wouldn't have bothered about your spending habits. Anyway, it is a pretty ingenious plan, which will silence your friends in the Left parties and the opposition for a while. The plan will definitely build your reputation as a reformer with a golden heart and, who knows, if your political stars are favourable after the next elections we may even continue this dialogue next year.

During your speech, when you said ''taxpayers have made out a persuasive case for some relief'', I thought you were about to come up with an inconsequential Rs10,000 increase in exemption limit – like you did last year – or something like that. I was quite impressed when you said you were increasing the exemption limit to a full Rs1.5 lakh. You didn't stop at that and even pushed up the 10 per cent tax slab limit to Rs3 lakh and the 20 per cent slab limit to Rs5 lakh. I almost fell off my chair! So, next year I will be paying you only about Rs45,000 as against Rs90,000 you appropriated from me this year as income taxes. I save Rs45,000! That is serious money.

I plan to use your largesse to part finance a new Tata Nano for my wife. Ever since she saw Mr Tata launch the little cutie on television, she has been making daily calls to the local Tata dealer to make sure that she will be one of the first to get one.

Without this income tax cut, and the excise duty reduction, which will make the Nano even cheaper, it would have been impossible for me to buy her that car. I must say, you saved our marriage!

You must have read the editorial in a leading business daily, criticising this increase in exemption limit. Their argument is that, the limit is now lower than even the US where everyone who earns more than $3,400 or around Rs1.35 lakh a year pays income tax. Yes, that only shows that the Americans can sometimes be stupid. $3,400 a year is way below poverty line in the US and taxing all those poor people is like taxing all Indians earning Rs30,000 and above per year!

I am sorry if I appear too demanding, but I still feel you should have increased the basic exemption limit to Rs3 lakh. Though you will be collecting a meagre Rs15,000 per taxpayer on incomes between Rs1.5 lakh and Rs3 lakh, the aggregate sum is quite substantial. Assuming that there will be around 2.5 crore individuals earning more than Rs1.5 lakh next year, you stand to lose a massive Rs37,500 crore if you increase the limit to Rs3 lakh. That will obviously be unacceptable to you or any other finance minister.

Don't worry; I have a comprehensive plan, which you may consider if you happen to – as you claimed in an interview – return as the finance minister after the next election. In case you are not so lucky, I request you to leave this note on your list of 'to do' things on your desk so that your successor can look at it.

Here is my plan:

• Increase the basic exemption limit to Rs3 lakh per year. This will greatly reduce the workload of your tax sleuths who can be unleashed on the big tax evaders. Even if you can encourage – peacefully or by force – even a third of the evaders to become more honest, you would easily recover most of the revenue loss from hiking the exemption limit. You should seriously consider appointing some of the bank recovery agents to train your staff at the income tax department in innovative and highly effective methods to trace tax evaders and recover your dues.
  
  
• For incomes above Rs3 lakh, you may charge 20 per cent up to Rs5 lakh and 30 per cent above Rs5 lakh.
  
  
• All surcharges may be withdrawn, as they are never used for the declared purposes like education, health and so on.
  
  
• Not charging income tax on agricultural income allows the rural rich to declare their income from other sources as farm income and stay out of the tax net. Besides, there is no justifiable reason for not taxing rich farmers. Only small and marginal farmers may be exempted from income tax, and hence you should tax farm incomes above Rs5 lakh per year. To make it more acceptable, you may charge 20 per cent tax on farm incomes between Rs5 lakh and Rs10 lakh and 30 per cent above Rs10 lakh.
  
  
• Increase the deduction under Sec 80 C to Rs2 lakh per year and the deduction may be allowed for all kinds of long term investments – be it in equity funds, bond funds, own housing and other avenues available now. You may increase the lock-in period for such investments to 10 years, from three years as at present. The current deduction of up to Rs1.5 lakh for interest on housing loans may be withdrawn and included as part of the overall Rs2 lakh limit. These changes will remove the bias in the existing 80 C provisions in favour of equity and residential property investments.
  
  
• There are many who were disappointed when you increased short-term capital gains tax to 15 per cent from 10 per cent earlier. I am sure you will accept that short-term securities transactions are mostly speculative in nature and should be treated like any other business. Hence, any short-term gains from securities should be taxed at 30 per cent.
  
  
• Long-term investors should get beneficial tax treatment. But, it is bad policy to favour a particular asset class over others – like you currently do for equity investments. You may consider introducing a modest uniform long-term capital gains tax of 15 per cent for all asset classes.
  
  
• Mutual fund investments, including investments in exchange traded funds (ETF) and real estate funds (REIT), should receive the same tax treatment as other types of long-term investments.
  
  
• Gains from all long-term investments, including insurance plans, which are exempt now, should be taxed when the investor exits his holdings, at the long term capital gains tax rate of 15 per cent. Only pension plans that offer a monthly annuity after retirement may be exempted from this.
  
  
• Preferential tax treatment to foreign investors is no longer required, now that our country is unquestionably among the most attractive destinations for foreign investment – both industrial investments and portfolio investments. Hence, all income and capital gains taxes applicable to resident investors should be made applicable to foreign investors as well. Of course, existing bilateral treaties to avoid double taxation must be honoured – though such treaties with countries like Mauritius are a bit of a sham.
  
  
• Promoters of large Indian companies earn large amounts as dividends, which are tax free in their hands. Yes, the company does pay a dividend distribution tax, but at 15 per cent the rate is much lower than peak personal income tax rates. Retail investors can be given this benefit, but there is no reason why promoters should enjoy this largesse.
  
  
• Hence, dividend income above Rs10 lakh per year received by assesses should be taxed at peak income tax rate of 30 per cent. To avoid double taxation, credit may be given for the dividend distribution tax paid by the companies paying dividends. The high limit of Rs10 lakh is suggested to avoid hurting senior citizens who may be relying on regular dividend income from their long-term equity investments.
  
  
• Creation of wealth should be encouraged and hence you should not favour extension of wealth tax to productive assets – though you may consider increasing the wealth tax rate on non-productive assets. However, you should charge an estate tax on large inheritances passed on to successors after an individual's death. The number of billionaires in this country is multiplying every year and, like in the US, you should make it costly for them to pass on the wealth from generation to generation. This is of course to encourage all the rich kids to create wealth of their own, rather than spend their lives splurging the money their old men made.
  
  
• You may keep the base amount for the applicability of this estate tax fairly high, say Rs10 crore. For transfer of inheritances between Rs10 crore and Rs100 crore, you may charge 10 per cent. Above Rs100 crore, you may charge 20 per cent and 30 per cent for Rs1,000 crore and above.

This tax should be applicable on all inheritances, except agricultural land to avoid large farms being fragmented and become commercially unviable. You should prescribe 'transfer of effective control over assets' as the criteria for the applicability of this tax, to avoid the wealthy hiding their assets in holding companies, proxies and so on. There should be no estate tax if, like Bill Gates and Warren Buffet, our rich also decides to give away their wealth for philanthropy. 

This is a very straightforward plan that is fair to all classes of taxpayers, and is highly progressive by reducing the tax burden on the lower-income groups. The rich may complain about the estate tax, but you can always cite the existence of such a tax in wealthy countries and encourage them to be more charitable.

I wish you luck in the upcoming general elections and hope to see you back in North Block. In case you need my advice on election strategies, I am always available. I am yet to learn Tamil, but would be willing to do so if appointed as your election advisor.

Yours truly,

Vivek Sharma