(Jayachandran/Mint)
(Jayachandran/Mint)

Opinion | Overtaxing the rich could prove unwise

In a country of vast disparities, it is well understood that the wealthy must bear a heavier tax burden than the rest. But progressive taxation has its limits. Let’s not overdo it

Finance minister Nirmala Sitharaman’s budget proposal to sharply raise the tax on the country’s super-rich has reignited the debate on the extent to which the wealthy can be soaked. Those with annual incomes of 2-5 crore will now have to pay a tax surcharge—an additional levy on the amount payable under the usual top slab rate of 30%—of 25%, up from 15%, while those earning over 5 crore will have to cough up even more, their add-on charge having been raised to 37%. These hikes take the total tax liability of individuals in those two brackets to an effective 39% and 42.7% of their incomes, respectively. The rationale offered is familiar: That in a country of widespread deprivation, tax rates need to be progressive. The rich must bear a greater burden than others in helping fund the government’s development efforts. Politically, this sounds reasonable. After all, the utility of every extra rupee earned is far less for the wealthy who would have enough to pamper themselves even after parting with, say, a crore or two. Big earners, however, do not always see it that way, and their views should not be dismissed.

While few grudge governments their need to tax them per se, the highly paid believe they deserve their high earnings, especially those with special or rare skills in heavy demand. In many cases, as with CEOs, those awarding fat remuneration packages insist that the payout is only a sliver of the enhanced value generated by the person. The bulk of their rewards, top earners expect to keep. But when the portion demanded as tax goes above a third and begins to approach half, it starts sounding extortionate. The psychological barrier put up by a high rate could deter compliance, even push some taxpayers to go tax-regime shopping in a bid to relocate overseas. This is quite a risk to take for revenue gains that would only be modest in the larger scheme of things. In 2017-18, only about 140,000 assessees declared incomes of over 1 crore. The tax hikes this year are expected to add less than 3,000 crore to the exchequer. If a large number of taxpayers were to move offshore or set up domestic organizational structures as tax-saving vehicles, then the measure might turn out even less worthwhile.

Another worry is that the budget proposal could apply even to foreign investors, many of whom operate through trusts or associations of persons, which are classified as individuals for taxation. The new imposition could drive them away to other lucrative markets, which is the last thing India’s economy needs. What it does need is for the tax base to expand. More people must pay taxes, especially the non-salaried whose earnings are not hard to mask. In 2017-18, for instance, just 65 million individuals filed income tax return statements. It’s possible that the rest are too poor to qualify as taxpayers, but it’s likely that a lot of income is slipping through the net. So far, the government has shown a readiness to come down hard on evaders. That is good. But overloading the country’s big earners speaks of another kind of zeal, one that need not necessarily work out the way it is supposed to. All taxation assumes a participatory role on the part of taxpayers. Sure, a tax is not voluntary, and there is no quid pro quo, but every payer must find it fair.

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