Wages are taxed more than profits in India. This is borne out by official data. In 2009-10, while the statutory tax rate for profits of companies was 33.99 per cent (including surcharge and cess), the effective tax rate was only 23.53 per cent. Non-corporate partnership firms, association of persons (AoPs) and body of individuals (BoIs) too paid tax at an effective rate of only 20.78 per cent.

The Income-Tax Act provides for tax incentives to promote savings by individuals; exports; balanced regional development; creation of infrastructure facilities; employment; donations for charity and rural development; scientific research and development; and the cooperative sector. Accelerated depreciation is also provided as an incentive for capital investment. Most of these go on to reduce the effective rate of tax on profit-based incomes rather than on wage incomes, although the maximum marginal statutory rate for both personal and corporate income-tax is 30 per cent.

The issue in India, therefore, is not whether the rich should pay more tax but whether profits, return on investment and rent be taxed at higher rates than wages?

According to revenue department data, the rich in India do pay higher tax than the not-so-rich among the tax-payers. But when it comes to businesses, the effective rate of tax that they pay works out to be much less than what individual tax-payers pay.

It is another matter that many among the rich may not be in tax net at all. But for those who are in the tax net, the Warren Buffet rule already applies in India. It is not the case here that secretaries pay higher tax than their millionaire and billionaire bosses. So, unlike president Obama, prime minister Manmohan Singh does not have an equity issue (real or rhetoric) to raise and make a case for taxing the rich more to bridge the budget gap.

Yet, the issue in India is not very different from that in the US and some other advanced economies (See chart). There, corporations pay less than individuals – profits and dividend enjoy more tax brakes than salaries – one reason why the Oracle of Omaha pays tax at a lower rate than each of the 17-member staff in his office. So, the real question is should businesses be made to pay higher tax in India?

There are, of course, other infirmities in our tax laws and their administration that have been dwelt at length by expert panels from Raja Challiah’s in 1991 to Vijay Kelkar’s in 2004. Some of these issues on the reforms agenda have been addressed and more is promised in the Direct Tax Code Bill which is before Parliament.

As the central tax system goes, according to official data, the total number of tax returns filed by individuals for 2009-10 was estimated to be 2,93,46,795, that is less than 3 crore. But all those who filed returns did not pay taxes. There was nil-tax returns as well. But more interesting part is that there were no more than one lakh tax-payers who filed tax returns showing an annual income of Rs 10 lakh (one million) or more last year – that is only one lakh millionaire in a total population of 121 crore!

In any case, as many as 65 per cent of the population derive their income from agriculture and allied activities and are constitutionally guaranteed against paying federal income-tax. No state government has exercised its power to tax farm income in 60 years of the Republic. This exemption also allows many others – some times politicians, public servants, businessmen and celebrities – to escape the tax net by claiming their income as agricultural. So, while the rural rich goes tax-free, in bustling Indian cities, where wealth management companies assume that there is at least one-in-10 chance of a stone thrown into a crowd hitting a millionaire, tax evasion has been a constant challenge before revenue officials.

Then, India is a country which is regularly listed am-ong the most corrupt in world by organisations such as Transparency International. Much of the money made through illicit methods by people in its three-tier of bloated government, corporate and non-government sectors remains unaccounted for and, therefore, tax-free. This “black money” breeds more income that too escapes tax.

While government has claimed better voluntary tax compliance in recent years following reforms, evasion and unaccounted for income are admittedly still rampant.

So, if you are salaried and your neighbour is a self-employed professional or runs a small business, chances are that he could actually be paying much less tax even as he may be earning much more. But there is no doubt that individual incomes that are captured by the tax net is taxed progressively, meaning the rich pays more than the not-so-rich.

Under the present three-rate income-tax structure, the highest marginal rate of 30 per cent tax applies to the highest income bracket (Rs 8 lakh and above)

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while at lowest income-tax slab the rate is 10 per cent for earnings above the exemption threshold and below Rs 5 lakh. An intermediate tax rate of 20 per cent is applicable for incomes between Rs 5,00,000 and Rs 8,00,000. Of course, income of up to Rs 1.8 lakh is exempt from tax for men of less than 60 years of age.

For women below 60 years, the exemption limit is Rs 1.9 lakh. For senior citizens above the age of 60 years and below 80 years, the exemption limit goes up to Rs 2.5 lakh, while those above 80 years, enjoy a special tax-free income limit of Rs 5 lakh.

But it is not just a question of tax bases and tax rates. Who actually pays how much tax is also a function of tax brakes. The finance ministry calls these tax brakes as “tax preferences”. For the past six years, beginning the budget for 2006-07, the ministry has been listing the revenue impact of tax incentives or subsidies that are part of the federal tax system.

According to the latest such statement for financial year 2010-11, corporate tax concessions were estimated at Rs 88,263 crore while the collection was Rs 2,96,377 crore. These concessions rose from the 2009-10 levels of Rs 72,881 crore when corporate tax collection was Rs 2,44,725 crore.

On personal income-tax, the revenue foregone through tax sops in 2010-11 is estimated at Rs 50,658 crore while the collection amounted to Rs 1,49,066 crore. The collection was up from previous year’s Rs 1,32,832 core while the revenue sacrificed because of personal tax brakes was Rs 45,142 crore.

Tax foregone on account of Rs 1 lakh savings allow-ance available to all individual tax-payers was the single biggest concession amount-ing to Rs 37,424 crore. Profit-linked deductions in the case of individual tax-payers (under sctions 80-IA and 80-IB) added up to less than Rs 500 crore in 2010-11.

Overall, it is evident that profits get more tax brakes and, therefore, is less taxed than wages. It’s not difficult to pick: Capital, rather than labour, is tax favoured.