Tax hike on ‘very rich’ is worth a look, says FM

Jan 25 2013, 01:48 IST
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P Chidambaram, finance minister P Chidambaram, finance minister
SummaryFinance minister P Chidambaram gave further credence to the debate over whether the super-rich should pay slightly higher taxes by saying the proposal is worth looking at.

Finance minister P Chidambaram on Thursday gave further credence to the debate over whether the super-rich should pay slightly higher taxes by saying the proposal is worth looking at. Even as the minister sought to distance himself from the idea saying that “it is not his view”, he gave enough hints in an interview to a television channel that the matter is under serious consideration.

Official sources here told FE that a surcharge on income tax may be imposed in the Budget 2013-14 for people above a certain income threshold to be called “very rich”. Alternatively, the tax on dividend income may be hiked to the level other incomes are taxed, in cases where the amount is above a certain defined limit, impacting mainly promoters and other significant (large) shareholders, who clearly fall under the “very rich” category. A hike in the maximum marginal income tax rate — 30% at present — is a less favoured option, as this is the rate proposed in the Direct Taxes Code and a hike might not be in sync with the finance minister’s promise of a stable tax regime.

“I think we should have stability in tax rates but we should consider the argument that very rich should be asked to pay a little more on some occasions, but that is not the view I am expressing. That is simply the argument I have heard and I am repeating,” Chidambaram said. The minister added: “I believe in stable tax rates. However, I must concede that there is an argument, that when the economy requires, when the government requires more resources... the very rich should willingly pay a little more.” So, what the minister indicates is the argument for a transient regime of differential taxation for the extremely rich, given the economic slowdown and consequent decline in revenue growth.

Chidambaram's comments come against the backdrop of a global debate, from the US to France, about whether the very rich pay enough taxes and a group of economists suggesting slightly higher taxes for the “super-rich” in India in a pre-budget interaction with the finance minister on January 7. There is, however, an equally strong view that higher tax rates would reduce compliance and might not yield any net gain for the government. All industry chambers have vehemently denounced the proposal to increase tax on the super-rich while there have also been some voices from corporate India in favour of the proposal like that of Wipro founder Azim Premji.

Private listed companies had paid dividends close to Rs 60,000 crore to promoter groups in 2011-12. If a proposal to tax dividends in the hands of (very rich) recipients is implemented (currently there is a dividend distribution tax of 15% which the firms deduct), this could be one chunk that could be brought under the new impost.

India taxes personal income under three slabs – 10%, 20% and 30% – and education surcharges on these rates that make them slightly higher.

Chidambaram believes the the burden of fiscal correction must be shared fairly and equitably by all stake holders. “The poor must be protected and the others must bear their fair share of the burden,” he had said after taking charge of the finance portfolio last August. Clearly, the minister does not intend to spring a shock to the common man in his next budget, but may rather be inclined to make the rich pay more. In fact, the message many got from his four-nation investor meet earlier this week was that India's fiscal consolidation attempts lay emphasis on increasing revenue by simplifying tax procedure, not by raising tax rates. There may be spending cuts in the short term, but in the longer run, economic policy overhaul would spur growth as well as revenue. Chidambaram said fiscal prudence will be a key part of his budget.

Chidambaram estimates the GDP to grow at 8% in 2013-14, after a 6-7% growth this fiscal.

He said the forthcoming union budget would not be scripted keeping in mind the 2014 general elections. “The election is a good 14 months away from the budget. The budget will be a responsible budget,” he said.

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