Budget 2019: Not The Right Time To Introduce Taxes On Super-Rich, Say Analysts

The number of high net-worth individuals with declared income are very few, said Vivek Gupta, national head of M&A/PE Tax at KPMG.
The “Luxury Tax” square is seen on a Hasbro Inc. Monopoly board game arranged for a photograph taken with a tilt-shift lens in Oradell, New Jersey, U.S. (Photographer: Ron Antonelli/Bloomberg)
The “Luxury Tax” square is seen on a Hasbro Inc. Monopoly board game arranged for a photograph taken with a tilt-shift lens in Oradell, New Jersey, U.S. (Photographer: Ron Antonelli/Bloomberg)

India must focus on capital formation and attracting foreign investment to remain unaffected by a slowing global economy over launching taxes for the super-rich.

That’s according to a panel of analysts that participated in an interaction on BloombergQuint.

“We’re confronted with the problem of global and Indian economy slowing down currently,” said Vivek Gupta, partner and national head of M&A/PE Tax at KPMG. “Looking at the macro factors, a tax on net-worth is not for this budget at least.”

Agreed Girish Vanvari, founder of Transaction Square LLP, who said it may trigger “paranoid” investors to create wealth overseas after withdrawing capital from India.

As India heads into a federal budget later this week, all eyes are on whether the government would offer a fiscal stimulus to the economy, with investors adopting a wait-and-watch stance. Other factors weighing on investors’ minds include the monsoon season, which can influence rural incomes, and the corporate earnings for the June quarter.

Special Tax Slab For Super-Rich?

There are expectations over an additional slab for the super-rich and reintroduction of taxes on wealth and inheritance.

Nearly 60 percent respondents of KMPG’s Pre-Budget Survey 2019-20 think the government may consider a special tax slab for the super-rich. A majority of the people surveyed anticipate a higher tax rate of 40 percent for income above Rs 10 crore to be introduced in the budget.

Yet, such taxes may not generate much revenue, according to Gupta, as the number of high net-worth individuals with declared income are very few.

Surcharges exist for individuals earning over a certain threshold limit in addition to the normal tax rates, said Amarpal Chadha, tax partner & India mobility leader at EY. He said the surcharge under Income Tax Act is 10 percent if an individual’s income exceeds Rs 50 lakh, and 15 percent if it’s over Rs 1 crore.

There is a lot of hope that growth will be bolstered, government will spend and corporate will create jobs. We may go for a higher fiscal deficit and spur demand. And that’s where the anxiety of taxing the super-rich arises.
Girish Vanvari, Founder, Transaction Square

Wealth, Inheritance Taxes To Be Back?

There are expectations that the wealth and inheritance taxes would be reintroduced. Nearly 10 percent of the KPMG survey’s respondents said inheritance tax would be introduced again compared with 13 percent who believe wealth tax would make a return. The inheritance and wealth taxes were removed in 1985 and 2005, respectively.

However, seamless collection of such taxes is possible only if India has fabulous data on their citizens, said Chadha. “Looking at our social structure, how do you ensure it doesn’t harm people who only own a couple of properties but have three or four siblings?”

Chadha also said there was no social equity for citizens to cover their medical bills or old age-related expenses.

Watch the full interview here:

Here’s the edited transcript of the discussion:

What are the implications if inheritance tax does come about?

Amarpal Chadha: If tax like this comes, I’m sure it will have a leeway for limited number of households. Globally, while the wealth tax is going out, we still see multiple countries having inheritance tax. So, it’s not that something only India will do but it is all across.

If you look at how it will get implicated in our own country, we need to look at our status while we draft this law. I’m assuming if in this scenario the law comes then it will give leeway for household assets and try to capture people who are really high net worth. If you need to collect taxes, you need to grow the base. We have got large number of tax filers but still our tax collection is very small. That’s the focus area by getting into high net worth. Unless we target right audience, I feel inheritance tax would not get that kind of collection unless it is levied with lot of thought into it.

When we talk about the higher tax rate for super-rich compared with effective tax rate which the rich and super-rich have to pay, and they start off with much lower threshold income of Rs 10 lakh in India. Does that need to be taken into consideration? That you levy a higher tax rate but increase the threshold, so somebody who is not higher tax and higher income bucket but being classified as one doesn’t have to bear threshold? Is it possible to do it within the system and check and balances that we have in India?

Girish Vanvari: Absolutely and that’s a possible solution. Today we have three slab rates going up to Rs 10 crore and more for third slab. If there was case that something more than Rs 10 crore should be taxed at 40-45 percent which is the phenomena across the world and the tax rates are higher across the world like 40+ for super-rich category.

So, is there a case to have a fourth threshold beside the three which we have or fourth slab or income above a particular threshold—all those things are permutations and combinations which one could look at. That’s a better option than taxing wealth, which is according to me, capital formation for the country which just started to happen.

The last thing we want to happen is to dissuade people from capital formation. Otherwise how the jobs will get created?       
Girish Vanvari, founder of Transaction Square LLP

Do you reckon any tinkering with tax slabs will happen? Even if you want to get in higher incidence of tax income then may be let the lower threshold go up a bit?

Vivek Gupta: Should we have additional slab for super-rich beyond Rs 5-10 crores in personal tax situation? It’s debatable. In India, the number of people, including super-rich, from net worth perspective to declare annual incomes of more that Rs 10 crore would be very little. While I don’t have absolute data to suggest what kind of taxes could that mop up, I don’t know whether it could be material revenue generating number. From equity perspective, perhaps it sounds good. But on revenue perspective, an additional slab does not achieve much.

Perhaps slabs improvement at lowest end can be done. One wants to see, given where the real estate is, something can be done in respect of housing. From personal tax standpoint, interest deductions can go up and there can be some additional benefit provided. That will super charge real estate industry, which is going through its own stress, particularly through its stress in financial and NBFC sector. That might start some degree of capital flow happening there. Real estate is a job generating sector. Job generation will be core part of this budget. Beyond that, I don’t think they will tinker much on Rs 5-10 lakh. Let’s see what happens.

I think they should resist the temptation of increasing the surcharge which is already at 15 percent for amounts above Rs 1 crore. I think they will resist it. this budget will focus far more on capital formation and on non-tax measures to increase revenue from tax standpoint. If no taxes are increased, that will be broad expectation. Some sectors like housing given some degree of incentivisation in terms of tax provisions.

There are rumors of vacant land tax or higher taxation on landowners who have more than a particular threshold of quantum of land in their kitty. How high is the likelihood of such a thing happening? What is the impact of it?

Girish Vanvari: When we look at land and real estate, there are three angles to it. The first is land reform which are much awaited that digitisation and centralisation of land records and tracing people who own the asset.

Second part is state-oriented which is stamp duty rate. Third part is, should there be tax on ownership which is wealth tax on land and properties. One first part of it, land reforms are overdue. They should look at trend of government with the Benami Law where there is substantial beneficial ownership. Land reform will get an impetus. It can happen outside the budget and doesn’t need to be in budget. It may be just be an announcement.Stamp duties are state subject and so I won’t touch upon it. Each state has its own rate and it has been big source of revenue for most states.

Third part is, on wealth tax and ownership of land or ownership over a particular size of land. You can’t take land in isolation. Taxation and ownership of wealth is a bigger change in taxation policy which should not be taken knee jerk only for land. As the time is right, new tax will come in which can be thrown and debated in future.

Do you think practically tax on vacant land is possible in first place or they are just rumours?

Amarpal Chadha: Land reforms have been on for some time. There’s a lot more to do. From Indian culture perspective, we put lot of emphasis on land as a security. Having assurance of land ownership records, the whole journey is to take land records in place, not only from tax perspective but also from security perspective.

This is a journey. Benami, black money, all these discussions play big time in the real estate discussions. We have come some distance from that point. There is still lot to do on land reform. Taxing vacant land or taxing agricultural land, all of these are under active discussions. It impacts each and every individual.

If they come, they wouldn’t surprise you?

Amarpal Chadha: Yes. It’s good to have direction. We need to look at fact of re-emphasis on budget and strategy for the country. We’re looking at long-term sustainability employment generation for five years. It will be more capital. I expect more journey kind of statements rather than immediate actions.

Can you share 2-3 things which stood out from the KPMG Pre-Budgets survey?

Vivek Gupta: There are 2-3 key messages from our survey. People expect continued moderation of corporate tax rates in line with that announced by then Finance Minister Arun Jaitley 4-5 years ago. That’s clear expectation coming from corporate sector and from people who was surveyed.

There is expectation that either in this budget or with direct tax code coming in some of the irritants to important transactions for the economy-like transaction occurring under Insolvency and Bankruptcy Code or raising of money by startups, some of those irritants will be smoothed out and cleaned up. There is very clear thread where corporate sector is clearly saying that we expect that clean up to happen. We believe this government is vested with that kind of moral authority and this government will take it forward meaningfully.

The preponderant view on this debate is similar that it is the time to focus on capital investment. I don’t think there fundamental disconnect with fact that ultimately tax inheritance is by social equity perspective is perhaps justifiable. Equally, there is strong voice to say we don’t want flight of human as well as entrepreneurial capital. We don’t want flight of real capital. Therefore, now is not the time to tax capital but unleash more capital formation in the economy. These three points stand out from our survey as our key takeaways from what corporate India feels.

There’s strong voice to say we don’t want flight of human as well as entrepreneurial capital. We don’t want flight of real capital. Therefore, now is not the time to tax capital but unleash more capital formation in the economy. 
Vivek Gupta, on taxing the super-rich.

What are the possibilities and implications on gift tax?

Girish Vanvari: Gift tax and inheritance tax go hand-in-hand. If you tinker with gift tax, then you somehow need to (modify) inheritance tax. I don’t think gift tax should be taken in.

There is lot of hope that growth will be bolstered. There will be government spend and corporates will be encouraged to create jobs. The anxiety is what will happen to fiscal deficit. Will they go for higher fiscal deficit and spur demand? And the anxiety of taxation on all super-rich arises. This is the way I will look at it.

Any other way of taxing the super-rich that you can think of?

Amarpal Chadha: People expect a balanced view of the tax system. If you’re looking at personal tax, I will put entire thing in one bucket of social security system—wealth tax, inheritance tax and see how it impacts life cycle of an individual and how he bequeaths his assets to next generation. It needs to be looked in sync.

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