India’s rich dodging taxes, adding stress to the government
NEW DELHI — In a country long defined by its poverty, it’s easy now to find India’s rich.
They’re at New Delhi’s Emporio mall, where herds of chauffeur-driven Jaguars and Audis disgorge shoppers heading to the Louis Vuitton and Christian Louboutin stores. They’re shopping for Lamborghinis in Mumbai. They’re putting elevators in their homes and showing off collections of jewel-encrusted watches in Indian luxury magazines. They’re buying real estate in comfortable but unpretentious neighborhoods — neighborhoods thought of as simply upper-middleclass just a couple years ago — where apartments now regularly sell for millions of dollars.
They’re just about everywhere. Unless it’s income tax time. Then, suddenly, they barely exist.
The reality is simple: “There are very few people who are paying taxes,” said Sonu Iyer, a tax expert at Ernst & Young in New Delhi. And tax dodging is everywhere. “It’s rampant — rampant.”
Finance Minister Palaniappan Chidambaram stunned the country in late February when he proposed a new tax on India’s top earners. The surprise wasn’t the temporary 10 percent surcharge on those earning more than10 million rupees ($185,000), but the number of Indians who fall into that category. That number? Just 42,800 people. “Let me repeat,” Chidambaram told Parliament in his budget speech, making sure no one thought he had misspoken, “only 42,800” people in a nation of 1.2 billion say they earn that much.
Among the rich, dodging taxes has become second nature, said Jamal Mecklai, chief executive officer of Mecklai Financial, a Mumbai-based financial consulting firm.
About 158,000 Indians are thought to be millionaires, according to a 2012 Credit Suisse estimate.
“It’s just taken as the reality” that most wealthy Indians are cheating, he said, adding that he pays everything he owes. India’s top tax rate is currently 30 percent.
But it’s not just the rich evading their taxes. Less than 3 percent of Indians file income tax returns at all, and officials say only about 1.5 million taxpayers say they earn more than 1 million rupees ($18,000) per year.
Most of those not paying have legitimate reasons — 400 million Indians still live below the poverty line and don’t pay income taxes.
Millions more people are exempt because regulations exclude agricultural income from taxes, no matter how much is earned.
Since India has hundreds of millions of small farmers, and a powerful bloc of wealthy farmers, that’s a tax break few politicians dare challenge. Various other tax breaks legally keep many more people off the tax rolls.
The bulk of those paying income taxes, experts say, are salaried employees whose companies are responsible for making their tax payments. While those taxpayers can fudge their numbers to an extent, using inflated receipts to magnify tax breaks on expenses like housing, it’s extremely difficult for them to completely escape tax authorities.
But most everyone else — from the barons of family-owned businesses to doctors, lawyers and small traders — operate in largely cash economies that enable them to hide most of their income. Experts estimate that anywhere from 17 percent to 42 percent of the economy operates beneath the official radar.
“It’s not really that difficult to chase down the tax dodgers,” said Mecklai, the consulting firm CEO. “It’s just a matter of putting the machinery in place.”