Does Super-Rich Taxation Require A Revisit?

In Budget 2019, Finance Minister Nirmala Sitharaman increased the surcharge applicable to individuals in the highest income bracket. While a surcharge of 10 per cent and 15 per cent was already applicable earlier for individuals earning in excess of Rs 50 lakh and Rs 1 crore respectively, Budget 2019 introduced two more surcharge rates of 25 per cent and 37 per cent for individuals earning in excess of Rs 2 crore and Rs 5 crore respectively. Thus, the effective tax rate for individuals having total income in excess of Rs 2 crore and Rs 5 crore has gone up to 39 per cent and 42.74 per cent respectively, from 35.88 per cent.

In Budget 2019, Finance Minister Nirmala Sitharaman increased the surcharge applicable to individuals in the highest income bracket. While a surcharge of 10 per cent and 15 per cent was already applicable earlier for individuals earning in excess of Rs 50 lakh and Rs 1 crore respectively, Budget 2019 introduced two more surcharge rates of 25 per cent and 37 per cent for individuals earning in excess of Rs 2 crore and Rs 5 crore respectively. Thus, the effective tax rate for individuals having total income in excess of Rs 2 crore and Rs 5 crore has gone up to 39 per cent and 42.74 per cent respectively, from 35.88 per cent.

While tax rates in India are not the highest, countries such as Japan, Denmark, Germany and Sweden have even higher tax rates. For example, taxes in Denmark could be as high as 56 per cent at the highest maximum marginal rate.

The increased tax rates have top honchos worried about the reduction in their take-home pays. Even large companies that hire expats for top positions are in a dilemma as the expats are typically offered a package net of taxes (the taxes are borne by the employer). Thus, any increase in taxes would hit companies that much harder as it would be costly to hire talent. It is a rarity, but currently the super-rich are paying taxes at a higher rate than the corporates.

Further, there are special rates of taxes applicable on certain transactions such as capital gains. The increase in surcharge also increases these special rates. This increases their tax outflow too. It may be noted that based on representations from various quarters, the government partially rolled back the applicability of higher surcharge on long-term capital gains on sale of equity shares, units of equity-oriented funds and units of business trusts. Thus, other long-term capital gains are taxable at a higher rate of 28.49 per cent against the earlier applicable rate of 23.92 per cent for individuals having taxable income in excess of Rs 5 crore.

The super-rich are also the ones who contribute significantly to investments. A steep increase in their tax bill affects their cash flows and is thus detrimental to investments made by them. The return on these investments made out of already higher taxed income, are also subject to higher taxes.

High taxes could act as a dampener especially when talent is easily mobile and could migrate to lower or nil tax jurisdictions. In view of the current economic slowdown, when the government is trying to boost the economy by providing tax relief to corporates, there is a demand to relook at the tax rates and slabs at all income levels, whereby the take home-pay increases from the current levels.

We would have to wait till February 1, 2020 to see whether this would get due consideration, when the Finance Minister presents the Budget.

(Homi Mistry is a Partner with Deloitte India; Ajay Nahata is a Senior Manager with Deloitte Haskins & Sells LLP)

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