Asking the super-rich to pay a little extra is a modest step in reducing inequalities. Instead, the Government must work towards bringing such citizens under a tax net

In the Union Budget 2019-20 presented by Finance Minister Nirmala Sitharaman on July 5, the Government levied a new surcharge on individuals, Association of Persons (AOP) and trusts with an annual income between Rs 2 crore and Rs 5 crore from the existing 15 per cent to 25 per cent and on individuals/AOS/trusts with income an income more that Rs 5 crore from the existing 15 per cent to 37 per cent. Post the hike, the effective incidence of tax will be 39 per cent on earners between Rs 2 crore and Rs 5 crore and 42.7 per cent on those earning in excess of Rs 5 crore.

This revised tax surcharge has led to a hue and cry. While wealthy Indian residents argue that this move will act as a disincentive to wealth generation, foreign portfolio investors (albeit those, who are registered in India as AoP or trusts) see this as a deterrent to attract foreign investment. Foreign Portfolio Investors (FPIs) opine that this move will be come as a setback at a time when the Government is keen on investing Rs 100 lakh crore in infrastructure to fulfill the dream of making India a $5 trillion economy by 2024-25. Arguments in this context are amusing.  

There is no dearth of wealth generation in this country, which is mostly concentrated in a few hands. 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 one 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.”

Indeed, this has been possible under the existing policy environment, which includes the policies on taxation. A slight tweaking of the policy (read: Extra tax on the super-rich), which is expected to yield Rs 12,000 crore (equivalent to less than a weeks’ addition to wealth by the billionaires), is unlikely to make even the

slightest dent on the pace of their wealth generation.

Put simply, consider a person earning in excess of Rs 5 crore per annum, say Rs 10 crore. Per se, an effective tax @42.7 per cent may appear to be high. But look at the absolute numbers: After paying Rs 4.27 crore as tax, he/she will still be left with Rs 5.73 crore or close to Rs 50 lakh per month. This is a substantial amount for leading an extraordinarily good life (with all amenities at their best) and yet save a good sum to take care of future needs even under adverse financial circumstances.

In recent years, we have seen Indian billionaires donating a portion of their wealth to welfare trusts with the intent of using the money to help the poor. They do this towards the fag end even as most of their life span is spent accumulating wealth, which may even involve fleecing the consumers (including poor) by charging higher prices and other unfair practices. The impact of such belated “philanthropic” steps could at best be limited.

So, the real issue is one of highly inequitable distribution of the fruits of development. Ironically, successive Governments (Modi 1.0 included) have only focussed on increasing the size of the cake, thinking that the benefits will automatically trickle down. But facts on ground zero speak otherwise.

Asking the super-rich to give a little extra is a modest step in the direction of reducing inequalities. However, there is an urgent need to nab those, who are currently evading the taxman. And this number continues to be huge.

According to the ‘Household Survey on India’s Citizen Environment & Consumer Economy’ (ICE 360° survey) by the People Research on India’s Consumer Economy (PRICE) for the year 2015-16 — when seen in juxtaposition with the income tax data for that financial year — for every person with an income more than Rs 5 crore paying tax, there are 13 people earning that much but they don’t pay. Bringing the latter under the tax net is a big challenge that the Modi Government must address (if this is not done, then the former will have a reason to grudge).

The resultant boost to tax collection will help the Government fund the galloping expenditure on building infrastructure. Physical: Rail, road, highways, port, airport and waterways among others.  Social: Schools, colleges, hospitals and wellness centers among others. Besides it can also fund a host of welfare schemes such as toilets, homes, electricity, gas connections, subsidised food and mid-day meals for school kids.

Money spent in this manner can contribute to generation of widespread demand (both by way of creating more jobs as well as augmenting capacity of the people to spend more) and in turn spur growth. It will also help in reviving a potent engine of growth, namely ‘private consumption’, which has been sagging for the last couple of years even as the Government has relied mostly on boosting ‘public expenditure’.

Had the surplus money remained with a few rich, this would be of little help in boosting demand as there are inherent limits to spending by any/group of individuals. Even if those few were to deposit the money in a bank, who lends it to industries and businesses, the impact will be much less than if it gets distributed among millions of people under welfare schemes or as wages to workers employed on projects undertaken by the Government with additional tax. 

Another potent way of helping the poor is for industrialists to cut prices, which will leave more money in the hands of the former. This will be inclusive development in the true sense of the term instead of the current focus on “tokenism” such as corporate social responsibility (CSR) or philanthropic initiatives.

In so far as the FPIs are concerned, the Government needs to follow a policy of taxing all wealthy people “uniformly”, irrespective of where they come from. Merely because a wealthy person is from a foreign land, he/she can’t be spared the levy of additional surcharge. This would have been outright discriminatory. Besides, it will have unintended implications of Indian residents moving their funds to foreign shores and bringing back (‘round tripping’ as it is known in common parlance) to benefit from the lower tax incidence on FPIs. 

Only 40 per cent of the FPIs registered as AOP or trust are affected by the increase in surcharge (as they are treated as individuals for taxation purpose) even as the balance 60 per cent registered as corporates need not worry. The former had chosen that route to avoid the hassles of registering a company; besides escaping the minimum alternate tax (MAT) that the latter has to pay. Having decided to go for AOP/trust, they should live with its pluses and minuses. They can’t do cherry picking;     

Even so, for AOP/trust earning more than Rs 5 crore, the hike in surcharge will increase the effective tax on long-term capital gains from 12 per cent to 14.2 per cent; whereas on short-term capital gains, this will be 21.3 per cent, up from 17.9 per cent. This isn’t the kind of blow that ought to affect foreign inflow. Nirmala Sitharaman has rightly dismissed the demand for roll-back or any dilution of the extra tax on super-rich in her reply to discussion on the Finance Bill.

(The writer is a policy analyst)