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Super Rich Tax : The Great Responsibility On Great Power

24 July 2019

“With great power comes great responsibility” while this dialog belongs to the famous Marvel Movie Spiderman, its essence was embodied in the latest Union Budget 2019 by finance minister Nirmala Sitharaman who further increased the tax burden on super-rich individuals falling within two income tax categories. Jocularly named the Robinhood Tax, this tax has mostly drawn flak from the business community from various fronts.

While some have compared imposition of this tax to the wealth or inheritance tax imposed on those who have inherited wealth and are also among the ‘super-rich’, others have criticized it on the grounds that this would adversely impact the expatriate employees especially the senior level ones.

Among the handful who support this tax are those who feel that the tax would increase the government’s revenue.

As per the budget, the individuals with income between Rs. two crore and Rs. five crore will be taxed in three parts- the actual income tax, surcharge and the cess.

The surcharge is a tax imposed on a tax. Whereas a cess is a charge levied by the government to raise money for a particular purpose or goal. The effective tax – including all the three elements of tax, surcharge and cess- on the income earners between Rs. 2 crore to Rs. 5 crore is 39 percent, whereas the tax on 43 percent for those earning above Rs. 5 crore.

In India, the tax, surcharge and cess levied on the super-rich is as per the table below:

Thus, a person who is earning Rs. 2.5 crore per annum will have to pay a total tax of Rs. 79.4 lakh, whereas a person earning Rs. 7.1 Crore will have to pay Rs. 3 crore as tax. Thus, the amount of tax is a substantial chunk for the oe lakh individuals having income above Rs. one crore, as per the records by the Income Tax department.

“The tax on the Super-rich also affects the investors in this category, as the high taxation has made them nervous and unwilling to invest at the time. This has also affected the markets and FPI’s who might decide to hold back on investments in India due to high tax rates,” Manvi Deshlahara, research analyst at CapitalVia Global Research said.  

Those criticizing the tax on fundamental grounds claim that Modi government’s stand had always been that of encouraging ‘kaamdars’ over ‘naamdars’. The idea was to motivate and encourage the earners over those who had inherited wealth. In this context, a report by First Post suggests that the tax will be a burden for those who have worked hard to earn the income they get and have not inherited money from their ancestors.

The idea that wealth creation should not be taxed as it helps investments grow has taken a back seat following the Union budget 2019. The re-introduction of the long term capital gain (LTCG) tax on transfer of listed equity shares in the 2018 Union budget is also an example of the same category tax which had been abolished when the above principle was in force.

“An inheritance tax—if it is a prudently used one—is a soft way of putting a premium on the earning of wealth by work or enterprise over one in which it is acquired by family connections,” the report by First Post read.

The government- much in favor of the high taxes has said that the rates were less than in other countries- like France where the highest tax rate is at 66.2 percent, Canada (54 percent), USA (50.3 percent), Japan (49.9 percent), China (45%), South Africa (45%) and UK (45%).

However, this tax was termed as the highest by several media organizations following the announcement of the budget.

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