Education

Super-rich taxation dilemma ahead of the Budget

Amarpal S. Chadha | Updated on March 12, 2018 Published on January 27, 2013

Noteworthy: Economists have suggested a surcharge on income above a certain threshold in order to tax the super-rich and generate additional tax revenue.

Amarpal S. Chadha is Tax Partner, Ernst & Young

Instead of taxing the super-rich further, an alternative suggestedis to widen the tax base.

There is currently a great deal of discussion on whether the super-rich — individuals with great wealth and power, such as heirs to fortune, top business executives, successful venture capitalists, politicians, and celebrities — should pay more taxes than the rest. And opinion is divided between those in favour and against it.

Currently, the progressive income-tax slab rates for an individual are 10, 20 and 30 per cent for different levels of income, with the highest rate applied on income above Rs 10 lakh. Economists have suggested a surcharge on income above a certain threshold in order to tax the super-rich and generate additional tax revenue. Some developed countries have a progressive tax regime where the highest rate becomes applicable only after a high threshold.

To explain, let’s use the example of a top management executive, say Anil, whose annual income is Rs 40 lakh. Currently his tax liability would be around Rs 10.61 lakh. If the Government introduces a surcharge of 10 per cent for individuals whose income exceeds Rs 30 lakh, Anil’s revised tax liability will be Rs 11.67 lakh. This, while enriching the Government, could end up de-motivating Anil, as he is forced to pay additional tax just because he has earned more.

Another option under discussion involves taxing the dividend income received by the super-rich beyond a threshold limit at the same rate at which it is taxed in the hands of the company. Currently, companies pay dividend distribution tax of 15 per cent, and the dividend income is exempt in the hands of the shareholders. This proposal if implemented will greatly dent the promoter groups of large companies, as well as individuals who have significant shareholding in companies.

Normally, reduced tax rates will induce more individuals to comply with regulations and step up tax revenue collection. Hence, instead of taxing the super-rich further, an alternative suggested is to widen the tax base — that is, bring more people into the tax net.

Another widely discussed issue is inheritance tax, which was first introduced in 1953 and later abolished in 1985. There is a lot of debate on the consequences of such a tax, given the low compliance rates in India, including compliance with wealth tax provisions.

Personal tax compliance in India in percentage terms is worryingly in the single digits. Given the population size and the growth of the economy over the past two, personal income tax and wealth tax can lead to an upward spiral in collections if there is greater focus on widening the tax base.

Amarpal S. Chadha is Tax Partner, Ernst & Young

Published on January 27, 2013
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