There is a danger of the super-rich considering leaving India and this is already happening
In the Union Budget, Finance Minister Nirmala Sitharaman introduced a surcharge of 3 percent on high net-worth individuals (HNIs) individual earners with taxable income between Rs 2 crore and Rs 5 crore, and of 7 percent on those having taxable income of over Rs 5 crore.
To put it simply, people earning Rs 2-5 crore will have to pay 39 percent income as tax, while individuals with an annual income of over Rs 5 crore will have to shell about 42 percent. For instance, now a person earning Rs 5 crore needs to pay a income tax of Rs 2.1 crore.
This makes India one of the countries with a high super rich tax. Indian super rich still pay less taxes compared to countries UK (45 percent), China (45 percent), Japan (49.9 percent), US (50.3 percent), Canada (54 percent), and France (66.2 percent).
Brokerage firm Motilal Oswal pegs the maximum possible receipts from this surcharge would be less than Rs 8,000 crore in FY20.
"From the perspective of resource mobilisation and social justice this cannot be faulted.But it has to be acknowledged that the tax incidence rising to 42 percent on the super-rich is very sharp," said VK Vijayakumar Chief Investment Strategist at Geojit Financial Services.
In country where income inequality has only gotten worse, taxing the rich and distributing it to the poor, sounds good on paper. An Oxfam study, early this year, said India's top 1 percent bag 58 percent of the country's wealth.
According to the Oxfam study between 2006 and 2015, ordinary workers saw their incomes rise by an average of just 2 percent a year while billionaire wealth rose almost six times faster.
There is a flip side on imposing high taxes on super rich. The capital that could have been put for productive purposes would be choked. The tax administration in India is improving, but still high taxes forces people to look at ways to evade taxes.
There is also a danger of the super-rich considering leaving India. This is already happening.
India saw the third highest outflow of wealthy individuals in 2018. Nearly 5,000 HNIs left the country, which is 2 percent of the total Indian HNIs, says the Global Wealth Migration Review (GWMR) 2019 by AfrAsia Bank and research firm New World Wealth.
This trend is not going to slowdown anytime and government’s decision to milk this segment will only hasten the speed. Adding to that, foreign countries, especially developed ones are enticing India's super-rich by offering permanent residencies and citizenship, if they invest there.
There is rush for US EB5 visas, ticket to permanent residency in the US, so much so that the waiting period now extends for seven years. The EB-5 programme was created by the US government to stimulate the US economy through job creation and capital investment by foreign investors.
Australia, Canada, UK, Cyprus, Italy, Portugal and Greece, among others, have such programmes to attract foreign high net worth individuals.
To be sure, while countries like US, UK, France, Canada and Australia have high income taxes, they provide far better public services like education, health, infrastructure, environment and social security services.
Adding to the degeneration of quality of life, the harassment of tax authorities and cumbersome rules to make overseas investments and buy assets outside is also hastening the flight of super-rich Indians.
"Typically HNIs, wants to have freedom to be mobile, they want they ability for them and their family to have assets globally, and to have a base globally. This about more about being a global citizen than trying to avoid taxes," said a CEO of an immigration firm that helps HNIs to migrate abroad, told Moneycontrol.India is a growing economy, the return on investment on assets here would give better bucks than any other country. Many of these HNIs are too rooted socially, economically and politically to leave the country, said another analyst.