High net-worth individuals (HNIs) and the top guns of India Inc have been in fear of a wealth tax being imposed on them. While finance minister Nirmala Sitharaman did not impose a wealth tax or change the income tax slabs, she did make things tougher for the super-rich by
increasing the surcharge on HNIs earning over Rs 2 crore.
In her maiden budget speech, Sitharaman emphasized on the rising income levels and how the citizens in the higher income bracket need to contribute more to the nation's development.
“I, therefore, propose to enhance surcharge on individuals having taxable income from Rs 2 crore to Rs 5 crore and Rs 5 crore and above so that effective tax rates for these two categories will increase by around 3 percent and 7 percent, respectively," she said. Markets did not perk up at the back of that in fact, major blue chips were under pressure at the back of the day.
HNIs with annual income between Rs 2 crore-Rs 5 crore
HNIs with income between Rs 2 crore-Rs 5 crore will see the surcharge on the income tax increase from 15 percent to 25 percent. The effective tax rate paid by these HNIs rises to 39 percent.
HNIs with annual income over Rs 5 crore
High net worth individuals with income over Rs 5 crore will see their surcharge increase from 13 percent to 37 percent This means that the effective tax rate that is paid by people within this income bracket is at 42.7 percent.
The increase in surcharge would impact about 60,000 assesses and raise Rs 15,000 crore to Rs 18,000 crore over the year as per the statistics for the assessment year 2017-18.
But the bigger point is that the tax rate effectively is at over 42 percent higher than even that of the United States, which has the highest tax rate at 40 percent.
This creates a stringent and tough tax regime for HNIs and that does not augur well in the long term.
Manas Fuloria, CEO, Nagarro IT Consulting & Services, said, “The personal tax for the highest earners (not applicable to me!) has been raised over the psychological barrier of 40 percent. On top of that, we have not seen any improvement in the aggressive approach of tax authorities even towards honest well-meaning business people. A moderate, rational and assesse-friendly tax system will help attract, create and grow business”
The view is echoed by most tracking the space. Amar Ambani, president and research head, YES Securities, said, “It’s a body blow to HNIs by levying a high surcharge on the rich. The big surcharge tax on the high-income group and possible liquidity squeezing of secondary market liquidity due to disinvestment and increased public shareholding is causing the stock market to fall today.”
In a different perspective, realty expert Parth Mehta, managing director, Paradigm Realty expects the move to impact luxury sales.
But there is always a silver lining if you consider that things could have been much worse. As Rishabh Shroff, partner & co-head, private client practice, Cyril Amarchand, outlines, "Promoters and entrepreneurs can breathe easy, given that the much-feared estate duty did not come! However, the issue is not fully closed, as the FM stated that those who are earning more should contribute more. Whilst this is an additional tax burden for Corporate India’s leaders, it is still far better than an aggressive estate duty."
Ramesh Damani, member of BSE, said, "The raising of the personal income tax rate would be negative. There are about 1.5 lakh taxpayers in India who are earning more than Rs 1 crore. So the amount of earning more than Rs 3 crore would diminish quite sharply after that. It is a tax against a very small minority.""The other thing that surprised me was the public shareholding to make it 65 percent, which will be very negative for the multinational companies (MNCs) which like to have a higher level of shareholding and promoter led companies, so the market will be a bit dubious about that proposal,” he added.