In a move that will significantly boost direct tax collections of the government at the cost of high net worth individuals, the government Friday announced raising the surcharge on taxable income of over Rs 2 crore. The government proposed to raise the surcharge for those with taxable income between Rs 2 crore and Rs 5 crore from the existing 15 per cent to 25 per cent, and from the existing 15 per cent to 37 per cent for those with income higher than Rs 5 crore.
What this does is that it raises the effective tax rate (including marginal tax rate, surcharge and cess) for those with income between Rs 2 crore and Rs 5 crore from the existing 35.88 per cent to 39 per cent, and for those with income above Rs 5 crore from the existing 35.88 per cent to 42.74 per cent.
While this is expected to yield additional revenue of around Rs 12,000 crore for the exchequer, high networth individuals will see a significant jump in their additional tax burden. Back of the envelope calculations show that while an individual with taxable income of Rs 3 crore would end up paying Rs 9.16 lakh more as tax, those with taxable income of Rs 6 crore will have to cough up about Rs 40.75 lakh more after the hike in the surcharge rates.
Finance Minister Nirmala Sitharaman said the new surcharge rate will increase effective tax rate by 3 per cent and 7 per cent for those earning between Rs 2 crore and Rs 5 crore, and those earning above Rs 5 crore, respectively. “In view of rising income levels, those in the highest income brackets, need to contribute more to the nation’s development,” she said in her Budget speech.
With this increase in surcharge rate, the total tax rate for high net worth individuals takes it closer to countries that have high income tax rates. Countries such as Sweden levy a personal income tax of 60.1 per cent, Denmark 55.9 per cent, while France, Japan, Austria levy close to 55 per cent. Some experts, however, argue that countries that charge higher tax provide a strong safety net to their taxpayers including free education and healthcare. Globally, certain sections of the societies in developed countries have been seeking higher tax on the rich and the affluent class. A 21-country OECD Survey in March had pointed out that in every country surveyed, more than half of respondents said that the government should tax the rich more than they currently do, in order to support the poor.
Tax experts said the hike in surcharge is quite steep and may lead to flight of capital from the country. “It is not the highest rate in the world but could have been avoided. The country needs investment but such a step may actually lead to flight of capital,” Amit Maheshwari, Partner, Ashok Maheshwary & Associates, said.
Some tax experts also said that such a step would actually incentivise taxpayers to find ways to avoid it. “People will find ways out of these tax levies, which is not good,” Surya Bhatia, Founder, Asset Managers, a Delhi-based investment advisory firm, said.
The surcharge will be subject to marginal relief to ensure that the surcharge payable is not in excess of the income that exceeds the threshold. Now, the total surcharge rates would be four — 10 per cent, 15 per cent, 25 per cent and 37 per cent, with 10 per cent for those with total income between Rs 50 lakh and Rs 1 crore, 15 per cent for those with taxable income between Rs 1 crore and Rs 2 crore.