Super-rich tax lacks teeth: Special treatment for dividend, capital gains take away its sting

Finance Minister Nirmala Sitharaman has steeply hiked the wealthy with a super-rich tax in Union Budget 2019. The income profile of industrialists’ is predominately made up of dividend and capital gains. The bulk of these two is taxable under special soft dispensations.

For the assessment year 2018-19, income tax for individual taxpayers has been increased by a surcharge of 10 percent if income exceeds Rs 50 lakhs but does not exceed Rs 1 crore. If it exceeds Rs 1 crore, the surcharge would be 15 percent. For the assessment year 2019-20, the taxation for the super-rich gets tougher—the 10 percent surcharge remains as it is, but the 15 percent surcharge is applicable only when the total income is between Rs 1 crore and Rs 2 crore. It gets steeper thereafter—at the rate of 25 percent when the income exceeds Rs 2 crore but does not exceed Rs 5 crore, and 37 percent, when the income exceeds Rs 5 crore. The surcharge on the rich looks formidable and frightening only on paper. In reality, it gets considerably watered-down. For instance, if an industrialist has a total income of Rs 5,000 crore for the assessment year 2020-21, one would think he would have to pay Rs 1,500 crore tax plus a surcharge of Rs 555 crore, thus making an aggregate of Rs 2,055 crore. The effective rate of tax for the industrialist would then be 41.1 percent. In a way, the super-rich tax would be the additional 11.1 percent, ignoring education and health cess. However, in reality, this is not the case. [caption id=“attachment_6941181” align=“alignleft” width=“380”]  Finance Minister Nirmala Sitharaman. ANI[/caption] The industrialist would have a large share of his income by way of dividend on which he doesn’t have to bother about any tax except to the extent of 10 percent. The company that is declaring a dividend has to pay 15 percent plus surcharge dividend distribution tax (DDT) and the recipient has to pay a soft 10 percent tax in addition, if the dividend income exceeds Rs 10 lakh. If the dividend income is Rs 2,000 crore for this industrialist, he will get away with a softer tax vis-à-vis those who do not fall into the super-rich category! The companies he would be receiving a dividend from would have paid 15.75 percent (including surcharge of 5 percent) on Rs 2,000 crore and the industrialist would have to pay 10 percent plus a surcharge of 37 percent, i.e. a tax of 13.7 percent. Far from being subjected to a super-rich tax, this industrialist will actually get away with a slightly less than the normal maximum marginal rate of 30 percent. Another huge sliver of the industrialist’s income in this instance is most likely to be long-term capital gains (LTCG) from the stock market which is also let-off with a slap on the wrist—just a 10 percent tax plus surcharge after exempting the initial Rs 1 lakh. Suppose his LTCG from the Indian bourses is Rs 2,800 crore, his tax liability on this score would be just 13.7 percent of Rs 2,799.99 crore. In other words, on LTCG, the super-rich gets away with just a 13.7 percent tax, a far cry from 30 percent maximum marginal rate of tax on the salaried class. The above examples aren’t exaggerations at all. This is the typical income profile of most of the industrialists who form a sizeable part of the super-rich club. In order to make a convincing claim of super-rich taxation, the government has to immediately abolish dividend distribution tax (DDT) and a special rate of tax for capital gains from the bourses so that all income is taxed in the same manner without preference or favour. The government has been oblivious of the typical income profile of an industrialist. Of course, there is the non-industrialist category of super-rich also. But their tribe is small. (The author is a senior columnist and tweets @smurlidharan)