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Tax hike on rich will also hurt global companies

July 06, 2019 19:48 IST

Tax experts said that in FY17 around 80,000 people had reported incomes of over Rs 1 crore

Illustration: Uttam Ghosh/

The Union Budget was expected to introduce an estate tax, or maybe, even a banking transaction tax.

However, Finance Minister Nirmala Sitharaman took the simpler way out - tax the rich even more.


The new tax rates - 39 per cent for incomes of Rs 2-5 crore and a whopping 42.74 per cent for incomes of Rs 5-10 crore - mean an effective increase of 3.12 per cent and 6.8 per cent, respectively.

“We have taken several measures in the past to alleviate the tax burden on small and medium income-earners, as those having an annual income up to Rs 5 lakh are not required to pay any income tax.

"We are thankful to taxpayers who play a major role in nation-building by paying their taxes.

"However, in view of rising income levels, those in the highest income brackets need to contribute more to the nation’s development.

"I, therefore, propose to enhance surcharge on individuals having taxable income from Rs 2 crore to Rs 5 crore and Rs 5 crore and above, so that effective tax rates for these two categories will increase by around 3 per cent and 7 per cent, respectively,” said the finance minister.

Tax experts said that in FY17 around 80,000 people had reported incomes of over Rs 1 crore and the impact of the move is likely to be limited.

“No changes in tax rates or slabs and raising the surcharge on higher income group in this Budget reflects the government’s continued focus of taxing more to those who afford to pay more taxes.

"The surcharge is proposed to be raised 25 per cent, and 37 per cent," said Kuldip Kumar, partner & leader, Personal Tax, PwC India.

However, he said that this increase in surcharge will adversely impact expatriate employees, especially senior-level ones, working in India.

Generally, such expats are tax equalised, and their taxes are grossed up as their employers bear their taxes.

Gross-up tax rate (on the net of tax salary) for individuals in the Rs 2 crore to Rs 5 crore income group comes out to be 63.93 per cent, and 74.65 per cent for those earning above Rs 5 crore, which could be higher than their home country tax rates.

Gross-up is the tax on taxes borne by an employer when it sends employees to other countries.

Tax experts said that while this rate seems to be significantly high, there are many countries which charge a higher rate.

Sonu Iyer, partner & national leader, People Advisory Services, EY India, said: “Higher effective tax rates for high-income earners though at first sight may seem painful, yet this is in line with the best global practices.

"High-income earners understand this and will willingly contribute to the much-needed revenues to transform India.

"Eventually, macroeconomics will ensure that all - the rich and the poor - benefit as India grows into an economic superpower.

"So let’s give this proposal a chance.”

There are countries like Sweden, Denmark and Japan which have even higher tax rates.

Joydeep Ghosh