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Super Tax For The Super Rich: Has Its Time Come?

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As the Union Budget 2013 nears, India has started seriously debating whether to tax the super rich. If the West proposes taxing the superrich, can India be far behind? The cat has been set among the pigeons by no other than the Finance Minister P Chidambaram himself. A similar debate over taxing the well-heeled has played out recently in developed economies like the United States to France. The question is do the very wealthy pay enough taxes?

India should consider the argument for higher taxes on the "very rich", Finance Minister P. Chidambaram said in comments likely to fuel speculation about steps he may take in next month's budget to boost tax flows and narrow a yawning fiscal gap. But he failed to explain who are the very rich. The very idea of taxing the rich may find support of the majority of the population, save for those who are to be taxed more. But Chidambaram has found unexpected support from the ranks of the super rich. Azim Premji, founder of India's No. 3 software exporter, Wipro Ltd, and India's third-richest person with a net worth of $1.2 billion, said at a gathering of business leaders in Davos, Switzerland, on 23 January, 2013 that in principle he was not against higher taxes for the wealthy.

Coming back to Chidambaram, it is not clear if the finance minister was referring to higher taxes on income, assets or capital gains in a regime that currently makes India a good place for the rich to live. India had 125,500 dollar millionaires in 2011, according to a Capgemini and RBC Wealth Management's world wealth report released last June.

In an off-the-record pre-budget meeting with Chidambaram and finance ministry officials on January 7, some economists pressed for higher taxes on the rich to make sure they are paying their fair share, alarming business lobby groups that warn such a move would stifle growth.

The growth rate of Asia's third-largest economy is widely expected to slip to a decade-low in fiscal 2012-13 as the government grapples with ballooning budget and current account deficits and high inflation. Chidambaram wants to plug holes in the nation's finances by cutting expenditure and increasing revenues through improved tax collection.

"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 in a TV interview aired on 24 January.

At present the top income tax rate is 30 per cent, which applies to earnings above Rs 10 lakh a year. There are just 35 million taxpayers in a country of 1.2 billion people, and of them about 1.5 million declare annual earnings of more than 1 million rupees, according to the Finance Ministry.

Only Premji Supports Taxing The Rich
The India Inc has been mostly against the move save for Wipro's Azim Premji who said at a gathering of business leaders in Davos, Switzerland, on 23 January that in principle he was not against higher taxes for the wealthy.

But for the rest, there was only vehement opposition. "A higher rate of tax on high income group taxpayers is uncalled for as this would discourage entrepreneurship. It could lead to professionals relocating to low tax domiciles such as Singapore, Dubai or London," said Naina Lal Kidwai, president, Federation of Indian Chambers of Commerce and Industry (FICCI) said at a meeting with Finance Minister P Chidambaram in New Delhi.

"Moreover, it is not the time to further damage the confidence of the investor community which has already been shaken badly on account of last year's tax amendments. The Government should not fuel the black economy by increasing tax rates," Kidwai said in the pre-budget consultation meeting.

In his presentation at the meeting, Adi Godrej, president, Confederation of Indian Industry (CII) strongly opposed any such move increase taxes for "super rich."

India's richest people tend to own businesses and other assets and thus have comparatively little exposure to salaries tax. Billionaire Mukesh Ambani, for example, was paid salary and perks of Rs 15 crore in the last fiscal year by Reliance Industries, which he controls. According to Forbes, Ambani is worth $21 billion.

"It is good electoral politics but economically doesn't make sense," said Venugopal Dhoot, who controls the diversified Videocon Group and ranks 38th in Forbes' India rich list with a net worth of $1.5 billion.

Widening The Tax Net
There is no inheritance tax in India, an issue Chidambaram raised as a concern after being appointed finance minister last August. In 2009, his predecessor withdrew a 10 percent surcharge on the 30-percent rate paid on earnings above 1 million rupees.

A government official with direct knowledge of the debate in the Finance Ministry said the focus is on plugging loopholes in the collection of income tax paid by individuals and companies.

"There are options of revisiting the inheritance tax and surcharge on income tax paid by the individuals," the official said, declining to say if these were firm proposals on the table for the budget to be unveiled around the end of February.

"Even if they bring (back) the surcharge that will only add about Rs 1500-2000 crore, which is a drop in the ocean and will be lost in the decline of tax revenues that will arise due to lower compliance if tax rates are raised," said Surjit Bhalla, chairman of advisory firm Oxus Investments.

A similar debate over taxing the well-heeled has played out recently in developed economies.

US President Barack Obama made it a central theme in his re-election campaign and won a political victory over his Republican opponents in getting Congressional approval for tax hikes on households earning more than $450,000 a year.

And French Prime Minister Francois Hollande's plan to hike taxes on income over 1 million euros made headlines after French actor Gerard Depardieu said he would move abroad.

Raising taxes on the rich would not make a significant impact to the tax-to-GDP ratio as a large portion of the wealth remains outside the mainstream system and is invested in real estate and gold or finds its way to tax havens.

But the problem with the Indian tax system has been that the honest tax payer is made to pay more and more tax while the dishonest tax payer seldom pays his dues. Perhaps the greater thrust should be on checking tax evasion and growth of black money as otherwise India could also see an exodus to tax havens like in many other countries.