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Wednesday 1 April 2020

Rich Never Paid 42.74% Tax, They Won’t Even In 2020-21

It is tempting to compare the Narendra Modi government with the Indira Gandhi regime, both being socialist of varying degrees. Given the zeal with which finance ministers since 2014, the late Arun Jaitley, stopgap Piyush Goyal and incumbent Nirmala Sitharaman add cess or surcharge to services, and Prime Minister Modi goes after tax evaders, it takes one back to 1973-74 when income tax and surcharge summed up to 97.75% of one’s income. Whereas Modi regime’s near 43% tax on the super-rich is far below Indira-level socialism, the two scenarios are analogous as, in both these periods, economists are lamenting the lack of private sector investment, which makes the government pump public money into the economy following JM Keynes’ prescription. While the eras of Jawaharlal Nehru and Indira Gandhi were associated with the “Hindu rate of growth” (2%-3%), Modi’s regime for the past few quarters have drawn close to it with the growth once going down to as much as 4.5%. If the businessmen, as well as the youth from families that could afford it, fled abroad during the Indira years and the only jobs the university graduates could think of were government jobs, once again there is a hue and cry over ‘unemployment’, may not be because there are no jobs but because the young of 2019-20 are strangely asking for public sector jobs as if they were products of the pre-1980s.

This perception that Modi is Indira reincarnated peaked during the budget of 2019-20 when Sitharaman announced an additional percentage of super-rich tax with aplomb. The 2% additional surcharge in 2015-16 had moved it up from 10% to 12% for those who earned more than Rs 1 crore per annum. This became 15% in the next fiscal that also had a 10% tax on income from dividend if that was more than Rs 10 lakh a year. Even this was not all that a rich citizen paid. Companies by then had already paid 15% tax on shareholders’ dividends. The situation seemed to have aggravated during the last budget when Sitharaman made those with a taxable income of Rs 2 crore to Rs 5 crore pay a surcharge of 25% and those earning more than Rs 5 crore pay 37% extra. But did these rich Indians actually ever pay 39% and 42.74% tax ever? No, they didn’t. How they worked around it follows.

Most known rich people do not draw high salaries. Instead, they earn much of what they do from dividends on the shares they hold. Their companies paid, including the 12% surcharge and the 4% cess for health and education, just 20.56% of tax. Then, the promoter of the company, with an annual income of more than Rs 5 crore, himself paid 34.8% of tax, which was a sum of 10% on dividend, 37% of that as surcharge and 4% cess on the sum of the first two.

Nevertheless, all hell broke loose after the previous budget, with Sitharaman being branded as a JNU-brand communist since her educational background was by then widely known. Nobel Laureate leftist economist Abhijit Banerjee saying in an interview that his views and those of Sitharaman nearly matched during their years in the said university.

While Sitharaman called a series of press conferences post Budget 2019-20 to roll back the policy measures announced in her July speech and go as market-friendly as bringing India’s corporate tax down to the level of the best ASEAN countries, the perception stuck. She refused to work on a facelift this 1 February even when she struck off the dividend distribution tax (DDT). Now the super-rich will pay 42.74% tax, the highest marginal rate, as the government will tax the dividend wholly from the recipient at a rate that is applicable. This is a sum of 30% of his income from the slab for the super-rich, a 37% surcharge on this 30% (= 11.1%) and a 4% cess on the sum of the first two (= 1.64%). So, will the magnates and tycoons now pay 42.74% of what they earn back to the state? Not quite.

They may now come up with bonus issues and stop declaring dividends. That is how the companies will reward all shareholders, the largest of whom are the directors.

Even this will stand relaxed when the government comes up with the taxpayers’ charter that Sitharaman promised in her budget speech. It is expected also to put the zealots among officials in the tax department on a leash.

But this may not be enough to clear the perception that Modi is anti-wealth creation, no matter how much he waxes eloquent about the need to appreciate these people. It is not merely the amount the rich need to shell out that bothers them. It is the variety of taxes they need to pay that gives the taxman excuses to harass them, to escape which they seek the help of chartered accountants so that the calculations are all correct.

Besides, giving away a big chunk of one’s money makes the rich look for undeclared earnings from tax havens overseas. It’s a provocation for black money. And when Indian money goes to a tax haven abroad, it is not just the tax that India misses out on. It is also the business that money has been put into, which, in turn, means Indians do not get the jobs those businesses create. Information about just a percentage of such tax evaders from just one of many destinations, Switzerland, coming to the notice of the authority after six years of Modi rule indicates it is not easy to chase the money India has once lost. And the Indian authority not revealing the names of the tax evaders suggests it will affect India’s own case as their resources are well-entrenched in this country too.

A profile to publish the works of established writers, authors, columnists or people in positions of authority who would like to stay anonymous while expressing their views on Sirf News

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