Why Did The Govt Choose To Increase Surcharge And Not Income Tax?

In the Budget 2019 that was presented recently by Finance Minister Nirmala Sitharaman, it was cleverly proposed to increase the surcharge on individuals earning more than Rs 2 crore.

For individuals with taxable income greater than Rs 2 crore but less than Rs 5 crore, the surcharge is proposed to be levied at 25 percent, which is a 10 percent higher than the currently applicable 15 percent. Further, for those with taxable income over Rs 5 crore, the surcharge will be applicable at 37 percent, a 22 percent hike over the current 15 percent.

According to EY India calculations, this will mean an increase in maximum tax rates for these individuals from 35.88 percent to 39 percent (Rs 2-5 crore income) and 42.74 percent (income above Rs 5 crore).

The question to examine here is why did the government take the decision to increase the surcharge rather than introduce a tax slab to charge income above Rs 2 crore and Rs 5 crore. Well, there were multiple factors considered in taking the decision.

Surcharges is an additional charge that is imposed on an existing tax liability. This means that the surcharge is imposed on the entire tax liability of an individual once their income exceeds Rs 2 or 5 crore. If it were on an income slab, only the amount than is in excess of Rs 2/5 crore would have been charged with a tax. Hence, the government will earn more from tax income through the surcharge route.

Further, unlike cess, which is introduced for specific (usually temporary) purposes (like education cess or swacch bharat cess), a surcharge is generally permenant in nature. The whole of the earnings made from surcharge goes to the Consolidated Fund of India, which is solely retained by the Central Government. The rest, that is the gross tax revenue is shared with the state governments. States get 42 percent of this revenue. On the other hand, states will earn a bigger share from the excise duty increase on petrol and diesel in the Budget 2019.

Revenue Secretary Ajay Bhushan Pandey told the Times of India the surcharge would cover around Rs 7,000 to Rs 8,000 individuals.

Another report by BloombergQuint quoting Rani Singh Nair, former chairperson of Central Board of Direct Taxes, said that introducing too many tax rates would have complicated the income tax structure while surcharge is simple and efficient to implement.

High tax rates on rich individuals is not a new concept. Australia and South Africa have higher rates, in comparison, but these countries also have a social security system that India lacks.

The wide wealth gap in India has been pointed out several times by social organisations. In a country where the rich are extremely rich, and the poor are extremely poor, a surcharge would be a way in which the rich are made to contribute towards India's growth.

At present, those with taxable income over Rs 50 lakh also pay a surcharge. For individuals with earnings between Rs 50 lakh and Rs 1 crore, the surcharge is imposed at 10 percent while those with earnings between Rs 1 crore and Rs 2 crore are charged at 15 percent. The rates remained unchanged from the previous year, so have all the income tax slabs for financial year 2019-20.