In 1973-74, the maximum marginal rate of income tax, including surcharge, reached 97.75 per cent. That was, of course, at the height of Indira Gandhi’s “socialism”, when taxation policy explicitly targeted bringing about “an appreciable scaling down of the concentration of economic power and reduction in the inequalities in income and wealth”.
That same socialism, according to a view expressed by many company promoters, is making a comeback, albeit in a creeping fashion. And it is ironically happening under a Prime Minister who, in his most recent Independence Day address, spoke of the need to “recognise and encourage the wealth creators of our nation”. This sentiment was also echoed in the Narendra Modi government’s Economic Survey tabled on Friday, which invoked the Arthashastra and Thirukkural to extol the virtues of “wealth creation through the invisible hand of markets”.
The apprehension regarding “creeping socialism” is based mainly on the tax proposals in recent Union Budgets, starting with that of Arun Jaitley in 2015-16 down to the latest one, for 2020-21, by Nirmala Sitharaman. The 2015-16 budget imposed a 2 per cent additional surcharge (12 per cent from 10 per cent earlier) on the “super-rich” having an annual taxable income of over Rs 1 crore. The super-rich surcharge was further increased to 15 per cent in the 2016-17 budget, which also levied a 10 per cent tax on dividend incomes received in excess of Rs 10 lakh per annum. The latter was over and above the 15 per cent tax already paid by companies on the dividends distributed to shareholders.
The real “socialist” turn, however, came in Sitharaman’s maiden budget for 2019-20. It created two new classes of super-rich: Those with annual taxable income of between Rs 2 crore and Rs 5 crore were subjected to a surcharge of 25 per cent, while it went even higher at 37 per cent in respect of individuals with incomes exceeding Rs 5 crore. The new surcharges took the effective maximum tax slabs to 39 per cent and 42.74 per cent, respectively.
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But given that most company promoters earn primarily from the dividends on their shareholdings — as opposed to salary — the above rates wouldn’t really have hit them hard. The actual tax paid by companies on the dividend distributed by them, after factoring in a 12 per cent surcharge and 4 per cent health-cum-education cess, was only about 20.56 per cent. Even after adding the 14.25 per cent effective tax on dividend received (10 per cent plus 37 per cent surcharge and 4 per cent cess), a super-rich promoter with an annual income above Rs 5 crore wouldn’t have shelled out more than 34.8 per cent.
That will change with the latest budget, which has done away with the dividend distribution tax (DDT) altogether. Henceforth, dividends will be taxed entirely in the hands of the recipients at their applicable rates. Simply put, the same super-rich promoter will have to pay tax on his dividend income at the highest marginal rate of 42.74 per cent. That includes the 30 per cent top basic slab rate, a 37 per cent surcharge on it (11.1 per cent) and 4 per cent cess on the sum of the first two (1.64 per cent).
“A 42.74 per cent tax is nothing but going back in time. In the 1970s, they could at least cite socialism. What justification can any government give now, when the rates were brought down to a maximum of 30 per cent in the 1997-98 budget itself? There will be no incentive any longer to declare dividends,” said the chairman of a South-based company, whose dividend income last year was more than 40 times his gross salary of around Rs 1 crore. Dispensing with DDT would have been fine if the 37 per cent “socialist” surcharge had also gone, he added.
Analysts believe many companies may now prefer coming out with bonus issues, rather than declaring dividends, in order to reward shareholders. That would be even more so when the promoters themselves are main shareholders.
“Increasing the surcharge on the super-rich and simultaneously shifting the dividend tax burden to the investor would make it look like creeping socialism. But I think that has got to do more with bureaucratic overreach. The Prime Minister and Finance Minister have both clearly conveyed that the government respects wealth creators and is working to tackle issues of tax harassment,” an official with a leading financial services firm noted, while rubbishing any parallels drawn with the Indira Gandhi regime.
He also pointed to the Modi government’s bold move in September to slash the basic corporate tax rate from 30 per cent to 22 per cent, apart from the decision to privatise companies such as Air India, Bharat Petroleum and Container Corporation of India. These are, again, a far cry from socialism.
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