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Business News/ Budget 2019 / News/  Higher taxes on the rich, but low returns for the Union government
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Higher taxes on the rich, but low returns for the Union government

The govt expects the additional revenue from the increased surcharge on individuals at just ₹2,724 crore
  • On Friday, finance minister Nirmala Sitharaman proposed to raise the surcharge on individuals earning ₹2-5 crore a year to 25%
  • The revenue from surcharge on super-rich individuals jumped from ₹738 crore in FY14 to an estimated ₹39,618 crore in FY20.Premium
    The revenue from surcharge on super-rich individuals jumped from 738 crore in FY14 to an estimated 39,618 crore in FY20.

    Mumbai: The budget proposal to impose an additional surcharge on India’s top earners may net the government a paltry sum, but damage investor confidence, force the wealthy to find loopholes or relocate to other countries and hit individuals who have made a large one-time gain, said experts.

    On Friday, finance minister Nirmala Sitharaman proposed to raise the surcharge on individuals earning 2-5 crore a year to 25%. For those earning more than 5 crore, it was increased to 37%, raising the effective income tax rate on the two highest slabs of income earners to 39% and 42.7%, respectively. A surcharge is a tax on tax and is levied on the tax amount you are liable to pay.

    Tax on India’s wealthiest has seen several increases in recent years. The 2013 budget first imposed a surcharge of 10% on those earning over 1 crore. This was increased to 12% in the 2015 budget and 15% in the 2016 budget. The 2017 budget brought yet more people into the surcharge net by levying it on those earning over 50 lakh. Justifying the surcharge, Sitharaman said the rich needed to contribute more to nation building. But given the small base of such individuals—only 102,000 people of India’s 1.3 billion population reported an income of over 1 crore as of March—a hike in surcharge may not net significant tax revenues, according to experts.

    The government too, doesn’t expect to raise significantly higher revenue from individuals in FY19-20 from the additional surcharges it has levied. It expects the additional revenue from the increased surcharge on individuals at just 2,724 crore. In comparison, it expects to get 9,173 crore more in surcharge on corporation tax, which has not been increased.

    (Graphic: Paras Jain/Mint)
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    (Graphic: Paras Jain/Mint)

    The challenge is to bring more people into the tax net, said Homi Mistry, partner at Deloitte India. “The surcharge is increasing and that’s widening the tax slabs. The pinch will be largely felt by the salaried and professionals. Even now the number of people who report income over a crore is small. While levying a surcharge is a simpler way to raise tax revenues compared to introducing new taxes, the challenge really is to bring more people into the tax net," he said.

    Experts have also questioned whether the psychological effect of a steep tax increase is commensurate with the additional revenue the government might get. “The additional surcharge may drive entrepreneurs and other high net worth individuals out of India," said Prakash Hegde, a Bengaluru-based chartered accountant. “Considering the low incremental revenue the government is estimating from the surcharge, the effect on business confidence is hard to justify."

    However, successive increases in surcharge have made it an important source of revenue for the government. The revenue from surcharge on individuals jumped from 738 crore in FY14 to an estimated 39,618 crore in FY20. In percentage terms, the share has gone from 0.3% to 7% of total income tax collected from individuals.

    But as with everything, there are loopholes that will cause leakages, according to Gautam Nayak of accounting firm CNK and Associates. “Super-rich individuals may incorporate limited liability partnerships (LLP) and deliver their services through them. LLPs are relatively easy to form and pay a 12% surcharge. The income distributed by an LLP is tax-free in the hands of its partners," he said.

    Other experts pointed out that middle class families might also be affected. Such families with income from property sales will face higher tax outgo in the year of sale, said Sandeep Jethwani, head of advisory at IIFL Wealth. “Such individuals should make use of the deductions on capital gains tax available under Sections 54, 54 F and 54 EC in order to minimize their tax liability," said Hegde.

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    ABOUT THE AUTHOR
    Neil Borate
    Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Published: 08 Jul 2019, 12:26 AM IST
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