Taxing the rich at higher levels

Reported by: |Updated: July 19, 2019

The Union budget for 2019-20 has proposed that individuals earning more than Rs50 million a year will be required to pay a surcharge of 37.5% on their income tax. This surcharge is over and above the 30% income tax such individuals are paying at present and the effective impact of the proposal and the various existing taxes on such individuals will be that they will end up paying more than 42% income tax. The finance minister justified the increase stating the measure is in lieu of the increasing income levels.

There are pros and cons. While the finance minister said the rich has to contribute more to nation building, and the rich in countries like the US and China pay higher taxes than those proposed (the government officials put the highest tax slabs at 45% in China and South Africa, and 50.3% in the US), the question one needs to ask is how much can the government expect from the proposal. India has just about 100,000 people who fall in this bracket and the increased tax they would pay is insignificant. And the proposal may become counter-productive too as such HNIs may decide to move to less taxed environments as today one can operate beyond the national borders and be effective at the same time. Dubai and Singapore are the immediate destinations with low tax regimes. Others can find ingenious ways of setting up enterprises and transferring their income to these enterprises, which will be required to pay just 25%. Or, they can manipulate their income/wealth in ways to show a low current income which attracts higher tax rates and more capital income (like long term capital gains or dividends) where tax rates are lower. There are entrepreneurs who draw Rs1 salary and reimbursements worth millions of rupees.

One of the basic premises in levying taxes is that the government spends a major part of this revenue in welfare measures. For example, in the so-called high-end tax regimes like the US or the Scandinavian countries, there are universal health care schemes and subsidized educational programs that benefit the citizens. Also, these governments support the less privileged through social security measures. India is still to migrate to such levels.

Imposing higher taxes on the wealthy may be good politics since it may not affect the majority. But, if increasing revenue is the target, this is definitely not the way. However, when the markets reacted strongly, this may not be the reason, but there are simple enough facts that the government should be looking at in order to be practical.