Tax­ing the rich at higher levels

Banking Frontiers - - Contents - N. Mo­han Mo­bile : 93228 95820 Email : mo­[email protected] bank­ingfron­tiers.com

The Union bud­get for 201920 has pro­posed that in­di­vid­u­als earn­ing more than ` 50 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 ` 1 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.

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