Millennium Post

India’s Richie-riches

Businessman Azim Premji, the country’s second richest person after Mukesh Ambani, may be a well-meaning person, but his suggestion at the recent World Economic Forum meet at Davos that it may be ‘politically correct’ to ask India’s super-rich to pay a higher rate of tax will not go down well with India’s Richie-riches. Even the government is divided on the issue. Highly pragmatic Union Finance Minister Palaniappan Chidambaram himself seems to disagree with the idea. Instead, he emphasises the need for higher tax compliance. Chakravarthy Rangarajan, chairman of the prime minister’s economic advisory council, though favours super-tax for the super rich. Chidambaram may find imposition of inheritance tax more relevant in India in view of the accumulation of wealth in the hands of a few. In fact, many Indian business tycoons think Premji, while justifying higher tax for the super-rich as ‘legitimate in a country as poor as ours’, might have been at best playing to the gallery knowing fully well the negative impact of such a tax regime on a handful of more tax-abiding businessmen and industrialists and the stock market. India’s problem, as Chidambaram has rightly assessed, is not about the under-taxed super-rich. It is about those super-rich tax evaders.

Over 50 per cent of India’s 3.4 crore income-tax payers contribute insignificant amounts as tax – ranging from Rs 50 to Rs 1,000 in most cases. This reduces the effective tax base to around 1.5 crore taxpayers, which includes mainly corporate houses, the salaried class and government pensioners. Well-heeled independent professionals and self-employed such as doctors, chartered accountants, lawyers, property agents, security agents, labour contractors, builders, architects, promoters, big shopkeepers, wholesale traders, private school, hospital and educational institute promoters, coaching class and nursing home operators contribute virtually nothing to the national exchequer. Today, they number several millions. These assesses with feisty lifestyles are reported to be filing tax returns that reflect incomes ranging from a mere Rs 1.5 to Rs 5 lakh a year. New tax payers added over the past three years show a decline, while a staggering 89 per cent of existing assessees are bunched in the lowest income bracket of Rs 5 lakh or less a year. Tax collected in the assessment year 2011-2012 in the Rs 0-10 lakh segment was Rs 21,094 crore, and Rs 10-20 lakh segment Rs 10,185 crore and above Rs 20 lakh segment Rs 53,170 crore. Only 1.85 lakh assessees or 1.3 per cent of all taxpayers fall under the last category.

India’s early three decades of punitive tax regime between 1950 and 1980 with the income-tax rate slapped at 88 per cent at the highest level. Additionally, dividend tax, wealth tax, corporate tax, gift tax, etc. and equally high excise and customs duty led to large-scale concealment of income by both individuals and companies and systematic creation of a parallel economy with increasing circulation of ‘black’ money, year after year. Excise and customs duty evasion, invoice manipulation, hawala transaction and illegal foreign bank accounts to circumvent the stringent foreign exchange regulation bolstered the black economy. The extremely high tax regime was first relaxed during the Rajiv Gandhi era between 1985 and ’89. The economic reform of 1992 brought about in stages a whole lot of tax reforms – direct and indirect – and India’s joining the World Trade Organisation totally eased the situation. But, the damage was done. For the country’s millions of high earning self-employed group, corrupt businessmen, politicians, bureaucrats, police and revenue department inspectors, the habit of income concealment and tax evasion continued.

However, on the positive side, thanks to the economic reform and liberal foreign exchange and tax regime, the country witnessed a surge of globally competitive local corporations and their wealthy entrepreneurs. Interestingly, the rise of India’s dollar-billionaires continued unabated even through the country’s recent falling GDP growth and depressed stock market. Between 2009 and 2011, the number of dollar-billionaires soared by almost 20 per cent to 55 as listed by Forbes. The combined wealth of those 55 Indian dollar-billionaires at the end of 2011 was $178 billion (approx. Rs 10 lakh crore) or around eight per cent of the country’s GDP. The richest of them is Mukesh Ambani of Reliance Industries flaunting gross wealth worth $21 billion, followed by Azim Premji of Wipro ($12.2 billion), Pallonji Mistry of Shapooji Pallonji ($9.8 billion), Dilip Shanghvi of Sun Pharmaceutical ($9.2 billion), Adi Godrej & family ($9 billion), Savitri Jindal & family ($ 8 billion), Kumarmangalam Birla ($7.8 billion) and Anil Ambani of ADAG ($6 billion) to the 55th ranked Glenn Saldanha of Glenmark Generics ($1.03 billion). There are 45 others with annual income varying from $490 million to $990 million who are set to enter the dollar billionaire club in the course to next two to three years. Much of their wealth is generated from their investment, mostly in stocks. With dividend income being tax-free in India, they make moolah.

Making the super-rich pay extra tax is not a new idea. However, it became rather trendy ever since US President Barack Obama, serving his second term, proposed a new tax regime for the American super-rich and France suggested a 75 per cent super-tax for its super-rich. The US Congress voted last month for a hike in tax rates on annual individual earning exceeding $4,00,000 and on couple more than $4,50,000 as a part of resolutions of crisis over the so-called fiscal cliff.

The Dutch territory of Aruba in the Caribbean, which boasts the highest living standard, taxes its super-rich at 58.95 percent. Sweden, the world’s best-known welfare state, taxes its super-rich or those earning over $85,841 per annum at 56.60 per cent. Its average annual individual income is around $48,800. Sweden, which also imposes 30 per cent tax on investment income, guarantees all its citizens free education, subsidised healthcare and public transportation and basic pension among other benefits. The highest tax rates in Denmark, the Netherlands, Belgium vary between 50 and 55.38 per cent.  

Considering the fact that India, home of the largest number of the world’s poor, offers hardly any social security to citizens, its existing tax rates are by no means low. It would have worked well for the country and the government, if only it had a good tax compliance tradition. (IPA)
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