Budget 2019: Here’s Why A Surcharge, And Not New Tax, Was Imposed On Super Rich

The central government’s decision to levy a surcharge on individuals earning more than Rs 2 crore, instead of introducing a new tax slab, will help it earn more revenue that it won’t have to share with the state governments, according to a government official.

Had the government increased the tax rate for such individuals, any extra revenue would have to be shared with the states, the official told BloombergQuint on the condition of anonymity.

That’s because the divisible pool of tax revenue—the portion that’s distributed between the centre and states—doesn’t comprise surcharges and cess levied for specific purposes, as per recommendations of the 14th Finance Commission. States get 42 percent of the gross tax revenue of the centre.

The incidence of income tax on those earning between Rs 2 crore and Rs 5 crore will be 39 percent, while individuals with annual taxable income of over Rs 5 crore will be taxed 42.7 percent, as per the announcements in Budget 2019. This would cover around 7,000-8,000 individuals, Revenue Secretary Ajay Bhushan Pandey was quoted as saying by Times of India.

Introducing too many tax rates would have led to complexity, according to Rani Singh Nair, former chairperson of Central Board of Direct Taxes. “Surcharge is simple and efficient to implement,” Nair told BloombergQuint. A surcharge provides government to mobilise revenue for specific objectives, she said.

States, however, will gain a portion of the excise duty hike on petrol.

States’ Mop-Up To Drop

The net proceeds of states from the devolution of taxes will decline by Rs 35,472 crore to Rs 8.09 lakh crore compared with projection made in the interim budget presented in February.

Budget 2019 projects a drop in states’ share in income tax to Rs 19,068 crore, and Rs 35,280 crore in central goods and services tax compared with interim budget projections.

However, Budget 2019 estimates an increase of Rs 2,160 crore in corporate tax compared with interim budget, and an increase of Rs 5,173 crore and Rs 11,542 crore in customs and excise duty, respectively.

The actual revenue received by states last year was significantly lower than what was estimated in the budget, DK Srivasatava, chief policy adviser at EY India, told BloombergQuint. States will suffer a revenue shortfall in the current year as the budget appears to have over-projected tax revenues he said.