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Will India raise taxes on the very rich?


Will India raise taxes on the very rich?
The yawning fiscal deficit that is slated to be at least 5.3 per cent for the current fiscal has raised a fresh debate on whether there is a need to tax the rich through various means to help bridge the deficit.

"India should consider the argument for higher taxes on the very rich", Finance Minister P Chidambaram stated recently. Given the precarious condition of the government's finances, and the need for populist measures in the forthcoming budget, since it is the last budget before the next general elections, Chidamabaram would be keen to augment resources.


First, one has to define what "super rich and "very rich" would mean. The maximum tax that an individual pays is 30 per cent. But, the very rich can minimise their income by buying into a whole lot of assets in India and abroad.

Recently, Barack Obama won an approval for tax hikes on households earning more than $450,000 a year. Should India have a new tax bracket for those earning more than Rs 10 lakhs and pay 30 per cent? Or, should there be some kind of surcharge on the maximum rates?

Many argue that India would not be able to raise much, unless tax is levied on assets, as it is easier to divert income into assets.

Interestingly, India's millionaries and high networth individuals are set to increase substantially, which could rake in the moolah for the government in the years to come.

"India is likely to see a substantial jump of 53 percent in the number of millionaires to 84,000 by 2017," Credit Suisse Research Institute's Global Wealth Report said.

According to Credit Suisse, India has 237,000 members of the top 1 per cent of global wealth holders. In any case, while it may not be a bad idea to tax the rich, one must look at imposing a tax on wealth and see if there is a need to increase wealth tax. Also, the government should look at the possibility of expanding the tax net, as just 3 per cent Indians pay tax, instead of chasing those who are already paying taxes.


How it is going to do that remains to be seen, since a majority of India's population is engaged in agriculture and presently agricultural income is exempt from tax.

Chidambaram it seems is non-committal at the moment on taxing the "very rich". ""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 Thursday.

His verdict on taxing the "very rich" will be out on Feb 29, when he delivers his budget for 2013-2104.

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