The super-rich have a greater propensity to invest. Thus the rise in tax outflow and reduction in savings could also distort the balance of overall savings and investments in the system.
Sudhakar Sethuraman, Ankit Agarwal and Abha Agarwal
Presenting the 2019 Union Budget, Finance Minister Nirmala Sitharaman enhanced the rate of surcharge applicable to individual taxpayers in India.
The surcharge was increased to 25 percent for those with an annual taxable income of between Rs 2 crore and Rs 5 crore and 37 percent for those earning more than Rs 5 crore from the earlier 15 percent limit. The effective tax rates went up to 39 percent and 42.74 percent from 35.88 percent.
The increased rates not only impact employees at senior levels but also corporates hiring these individuals and highly skilled expatriates, as the rise in tax pushed up compensation levels.
While the maximum margin rates are high, India is still behind certain countries such as Japan, Sweden, Denmark, etc, where the tax rates are much higher.
For instance, an individual earning Rs 1 crore in these countries will pay an average rate of tax of 56 percent in Denmark, 40 percent in Japan and 57 percent in Sweden, compared with below 36 percent in India.
Burdened employees, companies
The new rates have spread disquiet among senior executives in India. Executives with a taxable income of more than Rs 10 crore have employee stock options (ESOPs) as a significant part of their compensation. The increased rate not only impacts a higher tax outflow, but also reduces the take-home pay.
Typically, expatriate employees are hired on a tax- equalised model--the employer protects them from the incremental taxes that arise in India pursuant to their employment.
Consequently, companies now have to factor in higher salary cost for employing expatriates. They have to balance this in light of the expertise required vis-à-vis cost.
Savings take a hit
The salary income net of taxes is part of an individual’s savings and any passive income earned out of it is a saving too.
Increased surcharge exposes such individuals to a higher tax liability on the income from savings that has already suffered a higher rate of tax.
The post-tax return of investments might also come down. For example, fixed deposits that carry a return of 7 percent will come down to 3.99 percent after factoring the tax outflow.
The super-rich have greater propensity to invest. Thus the rise in tax outflow and reduction in savings could also distort the balance of overall savings and investments in the system.
Enhanced special rate of taxes
Besides the levy of normal rates of taxes, there are special rates of tax for certain categories of income i.e. dividend income, capital gains, etc.
With the change surcharge, the effective tax rate of such special rate of taxes also increases. For instance, a taxpayer with an income of more than Rs 5 crore may have to pay long-term capital gains at the rate of 28.496 percent as against the erstwhile rate of 23.92 percent. Such enhanced rates can dilute the intent of having special rate of taxes and does not rationalise the burden of the high-income taxpayers.
Advance tax blues
The Finance Act of 2019 received the President’s assent on August 1, whereby the levy of surcharge was with retrospective effect, ie from April 1, 2019. This will result in taxpayers paying interest under section 234C, as they would have not factored the increased rate while paying the first instalment advance tax that was due by 15 June 2019.
In her budget speech, the finance minister said the surcharge was increased considering rising income levels and, therefore, taxpayers in the higher income bracket should contribute more towards nation's development. One would have to wait for Budget 2020, to be presented on February 1, to see what is coming out to neutralise the increased tax rate for super rich.
(Sudhakar Sethuraman is Partner at Deloitte India, Ankit Agarwal a manager and Abha Agarwal is Assistant Manager with Deloitte Haskins and Sells LLP.)Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.