India has done well to create a fourth slab of taxing the super rich. With windfall personal gains, the super affluent have a higher duty as enablers of financial inclusion
Modi would be damned if taxes on the middle class were to be raised. It would equally be damned for taxing the emerging category of the Highest High Net Worth Individuals (HHNIs), comprising a minuscule universe of 8,000 people. The fact is that even the rich have not been touched by Finance Minister Nirmala Sitharaman in Budget 2019-20. Only the super rich have been asked to shell out more. This was the most inoffensive way of conforming to Chanakya’s prescription that “taxes should be collected the way a bee collects honey, without damaging the flower.” So, how do we term “Sithanomics” for inconveniencing only the poor-rich people, who comprise 0.01 per cent of the population, to raise the much-needed resources for the 99 per cent, who have been allocated welfare spends of Rs 1.30 lakh crore for increasing rural jobs and livelihood? Elitist/pro-capitalist or socialist? She is neither, veering towards being a pragmatist.
The actual disappointment of the Budget lay in not having reduced corporate taxation across the board to 25 per cent, which excluded 0.7 per cent of the firms above the Rs 400 crore turnover mark. That should make socialists happy as the 6,000 largest firms will continue to be taxed at 30 per cent, as compared to 17-21 per cent in the developed countries. However, in the interest of good economics, this was a big opportunity missed in kickstarting a virtuous cycle of investments and India cannot afford to be left behind if it wants to remain the fastest growing economy. Because, in comparison to its Asian peers, our country has the highest corporate tax rates, cost of land, cost of capital and electricity as also highest pendency of 3.5 crore cases under litigation — all of these lower the country’s global competitiveness.
To take advantage of the US-China trade war and to make India the preferred manufacturing destination, as also to give a boost to the exports sector, which has stagnated since 2013, it made sense that potential revenue losses, which would accrue by extending the 25 per cent corporate tax uniformly, would have been more than compensated by reviving the animal spirits of big industries. Because the largest corporates would have been tempted to loosen their purse strings for capital expenditure and job creation. There obviously was little headroom to reduce tax rates for large corporates as every one per cent reduction in rates means Rs 15,000 crore loss to the exchequer.
Modi 2.0 is obsessed with a single-minded mantra that the Prime Minister chants from Japan to Varanasi: To nudge India towards a $5 trillion economy by 2024. At present, the goal of doubling the $2.8 trillion economy in the next five years may sound an anachronism, given the current Gross Domestic Product (GDP) growth trend of six to seven per cent annually. Achieving sustained growth rates upwards of eight per cent is now an imperative, year on year, so as to raise per capita income and transit towards the UN’s Sustainable Development Goals and to become a middle-income economy. And if we don’t set the bar higher, we will never actualise that goal.
The Budget provides a fairly coherent road map for #India @$5 trillion by giving a boost to sectors that propel growth and job creation, like infrastructure and affordable housing; lowering cash transactions and going digital; going for e-assessments; creating a favourable ecosystem for start-ups by easing angel tax and simplifying regulatory hurdles for Foreign Direct Investment (FDI) in aviation, media and insurance as also easing norms for single-brand retail that will enhance the employment potential.
Working backwards from the Prime Minister’s stated goal needs some “blue-sky thinking” on part of policy makers, tinged with pragmatism. Blue-sky thinking is about dreaming the impossible, yet finding a way to get there. We know all too well that there are compelling reasons for the Government to factor in expenses to revive falling consumption and address rural distress, while sources of revenue are restricted.
So where can the additional resources have come from? It was but natural to pluck from the low-hanging fruit of taxing the super-rich without making the middle class bear the burden in order to balance the outgoing for welfare schemes, which is at 7.5 per cent of the GDP and increasing the outlays for health, housing and education.
Contrary to the elitist mindset that thinks taxing the creamiest layer is a regressive “Robin Hood” tax, extortionist, or socialist, taxing fresh income was a sounder concept than re-imposing wealth tax or estate duty that was done away with years back. WT or Inheritance tax is tantamount to triple taxation because when people acquire any asset from disposable income, they do so after having paid income tax at applicable levels as also other levies like GST and stamp-duty among other at the time of acquisition.
For those with incomes between Rs 2 crore and Rs 5 crore, will shell out between 39 per cent and 42.74 per cent — the highest tax rate imposed since 1992. This is absolutely in sync with changing realities of higher incomes earned like never before. Progressive taxation makes for sound economics. Besides, the extra revenue in absolute terms is expected to yield Rs 12,000 crore. When earnings are Rs 3 crore a year, or Rs 25 lakh a month, there is little cause to feel bad for “the poor, rich lad.” Those affected make for a small percentage of the 1.3 billion Indians. As per data on returns filed in 2016-17, of the 46.6 million taxpayers, only 16 per cent reported gross income between Rs 1 and Rs 5 crore.
Let us also understand the behavioural dynamics of the super-rich: When billionaires inherit or generate windfall profits, those one per cent of the privileged have a distinct edge over the 99 per cent through the compounding power of money, opportunity to network and influence policy making and are empowered with highest literacy. The system is then conducive to a “winner takes all” to amass fortune. So when fresh income is made, taxes must be progressively imposed on those accruals. Thus far, it has been a predatory system of wealth concentration in the hands of the few and inequality can only get bridged through policy interventions, not by whimsical generosity or CSR of the few.
According to a 2018 Oxfam Report released at the World Economic Forum (WEF) in January 2019, “Indian billionaires saw their fortunes swell by Rs 2,200 crore a day last year, with the top 1 per cent of the country’s richest getting richer by 39 per cent, as against just three per cent increase in wealth for the bottom-half of the population.”
Following international best practices, for example of the US, the richest one-tenth of the most affluent one per cent of Americans voluntarily offered just last week that “the next dollar of tax revenues should come from the most financially fortunate, instead of middle income taxpayers.”
India has done well to adopt this model of progressive taxation by creating a fourth slab of taxation to impose on super high net worth individuals. In the Finance Minister’s acknowledgement that “wealth is not a bad word”, it shows a shift in mindset from the socialist Nehruvian era. But with windfall personal gains come higher duties on part of the super affluents toward helping mainstreaming those financially excluded: The “gaon, garib and kisan.”
(The writer is an author, columnist and Chairperson for National Committee on Financial Inclusion at Niti Aayog)
