A higher income tax rate for the super-rich may be a bad idea as it would be a powerful disincentive for them to comply, but a surcharge, being temporary in nature, could still be tried, according to former finance minister and BJP leader Yashwant Sinha. In an interview to MK Venu for Rajya Sabha TV, Sinha also endorsed the idea of increasing tax on dividend income above a threshold. This, he said, can be done by making dividends beyond a level taxable in the hands of the recipients also, in addition to the levy at the company level, so as to take the effective rate to close to 30%, the marginal income tax rate at present.
On the proposal to increase the tax dividends for promoters and high net-worth shareholders, Sinha said: It is a very unpopular thing to do but there is a philosophical issue here. I am convinced that dividend income in the hands of the recipient should be taxed.... There are high net-worth individuals who are receiving all their income in dividend, which is not taxed... Because there are promoters holding 20% or 30% in the company and then are investing in instruments which are not taxed. So these high net-worth
individuals end up paying no tax. So if they (the government) have the stomach for it, please go ahead and do it.
When asked about his view on increasing the tax on the super-rich, he said: I would any day place more emphasis on compliance than merely increasing tax rates... If you increase the tax rates, then the same people who are already in the tax net will end up paying more and it will become a powerful disincentive for paying taxes. He, however, suggested that a surcharge say, 10% on people with taxable income of above R50 lakh or R1 crore a year might be a doable option, as it would not amount to tweaking the rates. So if he (the finance minister) imposes a surcharge on the rich after a certain cut-off, then I wont disagree. A surcharge is essentially a tax on tax.
Finance minister P Chidambaram recently gave credence to the idea of increasing the tax on the super-rich a bit to address the fall in revenue buoyancy, saying that the argument was worth considering. FE had earlier reported on the finance ministrys plan to have a surcharge for a defined category of super-rich taxpayers and an idea doing the rounds in the ministry to tax the dividend income beyond a certain threshold, say, R20 lakh, in the hands of the receiver also at the same rate as it is taxed at the givers end.
Currently, companies pay 15% dividend distribution tax but the dividend is tax-free in the receivers hands. If the proposal is cleared, the new impost would be levied only sparingly so that it impacts only the really affluent like promoters of large companies and other significant shareholders.
Listed private companies paid dividends of close to R60,000 crore to promoter groups in 2011-12. This is one chunk, FE had reported, which could be brought under the additional dividend tax.
Currently, the marginal tax rate for people with a taxable income above Rs 10 lakh per annum is 30%. As per information furnished by the finance ministry to the parliamentary standing committee, of the 32.4 million taxpayers, some 400,000 reporting taxable income higher than Rs 20 lakh, paid over Rs 93,000 crore as income tax in 2011-12 while the total personal income revenue stood at around Rs 1.7 lakh crore. This, it is reckoned, indicates the likely robust revenue gains a surcharge on the super-rich would bring. At present, taxpayers also pay an education cess of 3% on the tax paid.