In the Union Budget for 2019-20 presented by the finance minister, Nirmala Sitharaman on July 5, 2019, the government announced increase in the surcharge on individuals [or association of persons (AOP) or trusts)] with annual income in the Rs 2 crore to 5 crore range from existing 15% to 25% and on individuals with income > Rs 5 crore from existing 15% to 37%. This will result in an effective tax incidence of 39% on earners in Rs 2 crore to 5 crore range and 42.7% on those earning > Rs 5 crore.
There is much hue and cry more so because this will affect foreign portfolio investors [FPIs] who are registered in India as AOP or trusts. The plunge in the benchmark Sensex by a huge 395 points – following the budget announcements – was largely attributed due to this.
The critics argue that this will act as a disincentive to wealth generation. Furthermore, this will vitiate the environment for attractive foreign investment especially at a time when the government has an ambitious plan to invest Rs 100 lakh crore [US$ 1.4 trillion] in building infrastructure to achieve the GDP [gross domestic product] of US$ 5 trillion by 2024-25. The argument is a bit far-fetched.
Consider a person earning in excess of Rs 5 crore per annum say, Rs 10 crore. Per se, an effective tax @ 42.7% 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 save a good sum to take care of future needs even under adverse financial circumstances which is unlikely for a person at that level.
At the same time, Rs 4.27 crore coming to the coffers of the union government will help it fund the expenditure on building infrastructure physical: rail, road, highways, port, airport, waterways etc and social: schools, colleges, hospitals, wellness centers etc besides a host of welfare schemes such as toilets, homes, electricity, gas connections, subsidized food, mid-day meals for school kids etc.
The money spent in this manner will contribute to generation of widespread demand [both by way of creating more jobs as well as augmenting the capacity of the people to spend more] and in turn, spurring growth. It will help in reviving a potent engine of growth namely ‘private consumption’ which for the last couple of years has been sagging even as the government has relied mostly on boosting ‘public expenditure’.
Had the money remained with this person, this would have been of little help in boosting demand as there are inherent limits to spending by any individual. Even if he puts the money as deposit in a bank who lends it to industries and businesses, the impact will be much less than if it gets distributed among tens of thousands persons under welfare schemes or as wages to workers employed on projects undertaken by the government with additional tax.
There is no dearth of wealth generation in this country. The problem is that it gets 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 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.”
Imagine, the reverse of findings in the Report i.e. bottom half of the population had got 39% of the increase in wealth with the top 1% getting only 3%. Then, the impact on demand, growth and employment would have been phenomenal. But, that sounds like day dreaming as the rich are multiplying their wealth in geometric proportions, even as we go in a celebratory mode when a person at the bottom crosses the poverty threshold which is < US$ 1.
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 [e.g. treatment of say X number of cancer patients or education Y number of children from poor families]
A much better and sustainable way of helping the poor and reducing income inequalities is for the wealthy persons to contribute more by way of taxes besides following fair business practices which leave more money in the hands of people at large. That 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 moves by businessmen.
In this backdrop, there is a strong case for taxing the super-rich at the mentioned rates [the incidence is comparable to what similarly placed persons in developed countries such as USA pay]. From the hike, the government will garner about Rs 12,000 – 13,000 crore annually. However, there is an urgent need to nab those who are currently evading the taxman. And, that number continues to be huge.
According to a 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 [I-T] data for that financial year – for every person with income > Rs 5 crore paying tax, there are 13 persons earning that much but don’t pay. This shows the potential for boosting tax collection.
As regards, the impact on FPIs, the government needed to follow a policy on taxing all wealthy persons ‘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. That would have been outright discriminatory. Besides, it would have the unintended implication of Indian residents moving their funds to foreign shores and bringing back [‘round tripping’ as it is known common parlance] to benefit from the lower tax incidence on FPIs.
Only 40% of 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% registered as corporate need not worry. The former chose that route to avoid the hassles of registering a company besides escaping the minimum alternate tax [MAT] 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.
To sum up, the decision to increase the surcharge on the super-rich – be they Indian residents or foreigners – is fully justified. They should cooperate with the government in garnering resources needed for development and welfare schemes for the poor.