Why super-rich sulking over super-hike in tax rates is bunkum; someone ought to foot the bill anyway

The cacophony over Finance Minister Nirmala Sitharaman’s Budget proposal to tax the super-rich hasn’t died down yet. Sitharaman proposed to hike the surcharge upon those with taxable income between Rs 2 crore and Rs 5 crore from 15 percent to 25 percent. For those earning more than Rs 5 crore, the surcharge was hiked to 37 percent from 15 percent right now. So, that makes the effective tax rate on these two categories to 39 percent and 42.74 percent respectively.

The rich haven’t taken this spike in good humor. There is resentment. Nevertheless, in her recent interviews, Sitharaman has confirmed that the government is in no mood to reverse the decision.

But the question is why the super-rich act as if they are taken aback by the decision? As if they never had a clue of this coming? This was to happen anyways and they knew it all along.

 Why super-rich sulking over super-hike in tax rates is bunkum; someone ought to foot the bill anyway

File image of Finance Minister Nirmala Sitharaman. PTI

Here’s how the scenario unfolded: Ever since the Narendra Modi government came to power in 2014, the policy focus of this government has been amply clear. Put more money into the hands of the lower-income bracket as a means to empower and, of course, reap consequent political dividends.

Jan Dhan Yojana, arguably the first major economic/banking policy move of Modi, set the platform ready for this approach and signaled what is coming. Whatever social welfare schemes followed in the next five years and into the second term—free pension to small traders/farmers, free universal healthcare, endless farm loan waivers, and interest-free credit—confirmed this approach.

The strained, NPA-ravaged balance sheets of public sector banks, dominated by the government, demanded more state funds ever year. On the other hand, the continuing economic slowdown took a toll on the revenue-front. Stalled or delayed projects meant lower tax collections.

The disinvestment plan went off the track with no major appetite from investors. Lack of private participation forced the government to shoulder the burden of supporting growth on its own and pump in more money to the infrastructure to generate economic activity.

In such a scenario, sticking to the fiscal deficit road map turned a tightrope walk for the Modi government. Increased burden of social sector spending and low revenue inflows left not many options before the government to tap the super-rich sooner than later; just that this happened in Sitharaman’s first Budget. Will this move backfire? Actually, it has already begun to.

Foreign Portfolio Investors (FPIs) have been sulking over the decision and have been on a selling spree since then. In July, they sold a net Rs 3,758 crore from Indian markets. The higher tax charges will apply to individuals and domestic investors in the said income brackets as well. There will be repercussions going ahead as well.

But, it is not just about FPI investments but the larger fiscal balance of the government as well. It is unlikely that Sitharaman will bow to the pressure from the super-rich to do a U-turn on the surcharge. “Once you start rethinking, it becomes a dialogue of what is the level of a rethink. Are you looking at yielding only to FPIs? Then what happens to domestic investors? And then what happens to not having a level playing field between FPIs and domestic investors? It becomes a newer set of questions that we have to look at. So, I will leave it at that for now,” Sitharaman said in an interview to The Economic Times. The message is clear here.

After all, the super-rich cheered the Modi government on its inclusive, much vigorous social sector spending policies all these years. There wasn’t an ounce of criticism on large freebies and tax rebates to the poor. In fact, they lauded the focus on the not-so-privileged economically poor. Well, someone ought to foot the bill. Why frown now when the time has come?

Updated Date: Jul 29, 2019 15:06:58 IST