Overall, the policy might not affect the economy in a big manner as the increase in tax rates may not push the taxpayers from earning less
Finance Minister Nirmala Sitaraman proposed to hike the tax surcharge on super rich taxpayers earning above Rs 2 crore. Contrary to the expectations of many taxpayers, the budget made no change to common man tax slabs but disappointed.
The budget proposed an increase in tax surcharge to 25 percent from 15 percent for individuals earning between Rs 2 crore to Rs 5 crore, and for individuals earning more than Rs 5 crore it proposed to surcharge to 37 percent from 15 percent. With the latest move by the central government, the effective tax rate increases to 39 percent for the rich and 42.7 percent for the super rich.
According to the data from Income Tax Department of India, for the assessment year (AY) 2017-18, 4.89 crore of non-corporate tax returns were filed, out of which nearly 18,000 returns were filed with an income above Rs 1 crore. Hence, the current increase in tax surcharge will affect less than 0.04 percent of the non-corporate tax returns as the majority of these returns will fall in between Rs 1 crore to Rs 2 crore. But the amount of tax payable by these rich taxpayers account for nearly 16 percent of the non-corporate tax receipts.
Given that the Income Tax Act includes Association of Persons (AOP)/ Body of Individual (BOI), Trusts within the definition of an individual, the increased surcharge will also be applicable to a majority of the Foreign Portfolio investors (FPI) who invest in India.
The effective rate of peak LTCG and STCG will now increase to 14.25 percent and 21.37 percent, respectively. Currently, the peak rate is 11.96 percent for LTCG and 17.94 percent for STCG. FPI/FII remained net sellers in Indian equities for the first time in the month of July till date since January 2019. According to the data from NSDL, FPI/FII have withdrawn Rs 3,440 Crore in July till date pulling the headline equity benchmark indices nearly 4 percent.
The government did maths to fill the revenue deficiency caused by higher tax rebates and tax deduction for lower income group with the surcharge on the rich. Majority of the market participants believe that the increase in surcharge was not solely to levy higher tax on FPIs. Clarity on the same or perhaps an exemption for foreign investors from a surcharge on LTCG & STCG would be a relief to the markets.
Overall, the policy might not affect the economy in a big manner as the increase in tax rates may not push the taxpayers from earning less. However, the majority of the individuals and AOP/BOI may choose to operate in the form of corporates as the spread between the corporate and non-corporate effective tax rates will substantially increase after the current proposal.
The author is Vice President, Commodities, Currencies and Interest Rate Derivatives at Karvy Group.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.