A section within the Central government is of the view that the Budget proposal slapping a higher surcharge on the super rich will effectively discourage new investors and exacerbate the trend of migration of high net worth individuals from India. The imposition is seen as being in contradiction with the overall theme of the Budget — that of fostering private participation to catalyse a reversal in the sluggish investment sentiment in the country.
A top policy maker in the NDA government, who spoke to The Indian Express on the condition of anonymity, said the surcharge will have the “most deleterious” impact on investments in the country and push out unicorns (new age companies with valuation above $1billion) and discourage the inflow of high quality human capital that India was just beginning to attract.
“When we impose high surcharge on people earning over $200,000-300,000 (roughly more than Rs 2 crore), they may not want to invest in India and rather choose to migrate abroad… Hopefully, some changes will be made to these proposals when the Finance Minister (Nirmala Sitharaman) gives her reply to the Finance Bill in Parliament,” this official said.
Rs 12000 cr but at what cost?
An additional revenue of Rs 12,000 crore is being factored via surcharge imposed on the super rich but experts warn that this is far outweighed by its adverse impact on investments. The new tax will hit investment trusts through which many foreign investors put money into India’s stock markets.
The government should not look at tax rates in developed countries like Norway and argue that we have lower rates but rather compare with countries like China, Indonesia and South Korea that offer competitive tax rates. Norway has high per capita income, vast social security net and a host of other benefits that investors do not get in India, the official said.
While most proposals in the Budget – such as lowering corporate tax rate for companies with turnover up to Rs 400 crore, opening up FDI in various sectors, allowing private participation in railways, borrowing overseas to free up resources for domestic entrepreneurs – are aimed at galvanising investments, the surcharge on income tax has the opposite impact. The Union Budget 2019-20 proposed to hike the surcharge, charged on top of the applicable income tax rate, from 15 per cent to 25 per cent for those with taxable incomes of between Rs 2 crore and Rs 5 crore, and to 37 per cent for those earning more than Rs 5 crore. The government has defended this proposal arguing that the rich have a duty towards nation development.
“It (surcharge) contradicts the overall idea of the Budget of promoting investments. It kills animal spirits and forces talent out of this country,” one official said. “The view that it is mostly the salaried class which will get impacted is not correct. We have to think about the potential unicorns and entrepreneurs in the new sectors who were planning to set enterprise in India – that can potentially stop,” the official said. Even as the government will gain Rs 12,000 crore through the surcharge, the costs of such a policy decision completely surpass the benefits, the official said.
Opinion | First, let there be investment
Another senior official involved in tracking investment inflows admitted that the problem of investor flight was “a concern” and that the government is “actively working” to ensure that the investment climate is improved for domestic investors, alongside “sustained” efforts to attract foreign investors. At a time when both financial and human capital are highly mobile, the threat of migration out of India is not unfounded, this official said.
According to a 2018 report by market research group New World Wealth, which maintains a database of over 150,000 HNIs across 125 cities globally, India figured at the second place in a list of top 5 countries ranked in terms of the net exodus of HNI. The Global Wealth Migration Review for 2018, showed that while China was at the top, the number of Indian HNIs migrating to foreign destinations has been steadily going up over the years — from 4000 millionaires moving out in 2015 to 7,000 in 2017.