Parizad Sirwalla
With the thumping majority in the recently-concluded elections, it is expected that the re-elected government will set the stage for economic development in the full year finance Budget due on July 5. It will have to be seen how the government plans to achieve its objective of reviving the economy against the backdrop of sluggish growth in the past financial year.
One way to provide impetus to growth is to spur consumption by leaving more disposable income in the hands of individual taxpayers through moderation of income tax slabs or rates. On the other hand, the continued commitment of keeping the fiscal deficit under control may provide limited headroom to cut personal taxes, especially after the tax relief and social welfare schemes announced in the Interim Budget 2019 presented earlier in the year.
In wake of this, a question that continues to be debated before the annual Budget over last few years is: Will the super-rich or high net worth individuals be taxed more, either through additional levy or reintroduction of wealth tax?
Wealth tax as a concept is a tax on the net worth of an individual. This is in addition to the normal income tax which is levied on the income of the individual taxpayer in a particular year. In the early years of post-Independence era, wealth tax was introduced through the Wealth Tax Act, 1957, in order to counteract concentration of wealth with super-rich class of individuals and to encourage economic equality. It was computed at 1 per cent on the net wealth (in excess of Rs 30 lakh) owned by a person on a valuation date, i.e., March 31 of every year and encompassed prescribed categories of assets like jewellery, land, luxury cars, cash in hand, etc.
However, revenue collections through levy of wealth tax largely remained tepid throughout the period since its introduction and created a significant amount of compliance burden on the taxpayers as well as administrative burden on the tax department. Thus, the Act was eventually abolished by the Finance Act, 2015, with effect from April 1, 2015.
As an alternative and keeping in mind the objective of taxing high net worth individuals, additional surcharge of 2 per cent (making it to a total 12 percent) was introduced by the said Finance Act for those earning income more than Rs 1 crore. The levy of surcharge is easy to collect as well as monitor and also does not result in any compliance or administrative burden. Such surcharge was further enhanced to 15 per cent through the Finance Act, 2016, with effect from April 1, 2016, resulting in increasing the maximum marginal rate to 35.88 per cent applicable to an individual having a taxable income of more than Rs 1 crore.
The idea of a higher tax on the super rich appears to be borrowed from the developed world, which is trying to beat its rising fiscal deficit with increased taxes on the rich. For example, maximum marginal rate applicable to an individual on progressive income slabs in the UK, Japan and Australia is around 45 per cent, with 37 per cent in the US, according to KPMG Taxation of International Executives publication in 2018.
However, as we are a developing economy, it is imperative that a careful and meaningful evaluation of such proposal is done before taking any informed decision on this front. Also, wealth tax or inheritance tax is found to be more common in developed countries where a robust social security regime is driven by the government. In India, in absence of a universal social security protection in place for its citizens in the organised sector, taxing wealth additionally may be viewed as a dis-incentive to creation of wealth, which is essential for one’s livelihood post retirement.
In the past, it has been observed that higher tax rates has not helped strengthen the fiscal health and instead the overall tax compliance goes up when the tax rates are rationalised.
When we talk about taxing the super rich, it is pertinent to compare the effective tax rate applicable to an individual with that of other countries. India’s existing maximum marginal rate of 35.88 per cent is comparable to similar rates in other developing nations and also the highest rate of tax at 30 per cent triggers at a much lower threshold of income i.e. Rs 10 lakh only.
Thus, any levy of additional taxes or surcharge or reintroduction of wealth tax must be carefully evaluated in terms of applicability, rates and cost of compliance. Also the number of wealthy taxpayers with declared income of more than Rs 1 crore appears to be too less vis-à-vis total number of tax returns filed in a particular year. As per the statistics shared by the Income Tax Department for 2016-17, out of total 4.66 crore individual tax returns filed, only 0.16 per cent taxpayers declared taxable income of more than Rs 1 crore.
Therefore, to garner additional revenues, it is important to widen the tax base by rationalising current tax provisions and ensure greater compliance. Also, it is seen these days that the government is endeavouring the use of cutting-edge technology and data analytics to overhaul the tax administration to identify the wealthy tax evaders, which is a very welcome measure.
To summarise, the new finance minister must look at both sides of the coin before making any decision on re-introduction of wealth tax. Widening the tax base, creating better regulatory framework, keeping the tax rate structure simple and low cost of compliance for taxpayers are some of the factors that need thorough analysis to make an informed decision on this count.
Parizad Sirwalla is Partner and Head, Global Mobility Services – Tax, KPMG in India. Views expressed are personal.
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