Don’t-tax-the-rich campaign

With less than three weeks to go before the Union Budget, the focus is on government revenues. Experts feel that the Exchequer may take a hit of INR 2,00,000 lakh crore due to the lower rates under GST 2.0, and zero tax on personal incomes up to INR 12,00,000. The fear is evident from the manner the excise duties on cigarettes and tobacco products were raised by 20-30 per cent before the Budget, and which will be applicable from February 1. Hence, there is a feeling that the finance minister may find it necessary to raise the taxes on the super-rich to make up for the difference, and keep revenues buoyant.

The buzz among the wealthy is that Nirmala Sitharaman may raise the surcharge on personal incomes above Rs 1 crore a year, or INR 3 crore. In addition, she may reintroduce the wealth tax. Both, according to the tax experts, may prove to be counterproductive and futile. Wealth tax has been discussed for the past two years or so. However, past experiences show that the collections under wealth tax are not significant enough, especially when juxtaposed with the cost of administering and monitoring them. The rich invariably find ways, sometimes illegal or semi-legal, to avoid and evade them.

As far as the higher surcharge on super-high personal incomes is concerned, the Government earlier reduced the surcharge on annual earnings above INR 5 crore by a high 12 per cent. This was applicable from 2023-24 for those who filed returns under the new tax regime. According to a tax expert, “There is no need to revisit this, and hike the surcharge in three years.” Another one, quoted in a media report is more categorical that “it seems unlikely that the Government would hike this once again within a short span.”

Of course, there is no denying the fact that vertical equity needs to be maintained in personal taxation. This implies that the higher the income, the higher will be the tax rate. However, balance is important. Most experts feel that the nation has the ‘right’ tax slabs, with the lowest earners paying zero tax (for annual income up to INR 12,00,000), and the highest 40 per cent or so. This difference seems reasonable, and justified. Any changes to increase this may have negative implications, and will be counterproductive.

For example, a hike in surcharge on the super-rich may send the wrong signals. This will impact domestic private investments, and inflows from the foreign investors. In the recent past, net foreign direct investment inflows have been low, and even negative in some months. Foreign portfolio investments in Indian equities have turned outwards. Dramatic tax changes may further worry the investors, who may wish to stay away, and reduce their exposures in India. Tax stability, and certainty is crucial for fund flows. Sudden and regular changes do impact the ease-of-doing-business in a nation.

More importantly, as one of EY India’s tax partners told a media house, a higher surcharge may force high net-worth individuals to flee the country, and take refuge in low-tax jurisdictions. In the recent past, according to some reports, thousands of wealthy Indians have adopted this recourse. This implies huge capital flight as the rich take their money away with them, and invest it elsewhere, where the returns may be low, but so are the taxes. In addition, the money is safe from the clutches of the governments. Sometimes lower risks, and security is more important than returns.

There is a global competition among nations to woo capital from the wealthy. Some use force and pressure to do so, as is the case with America today, which is twisting the arms of both domestic and foreign investors to pump in more money to build local factories. Others do it through sops and incentives, as China successfully did for decades, and India has tried the same strategy. However, the most efficient means to attract money to keep taxes low, or at least stable. Hence, it may be a bad idea to increase taxes now.

Experts feel that the best way to increase official revenues is two-fold. One, the Government needs to improve tax collections, as it has done over the past decade or two, by using technology, collating relevant information, and sharing information with other nations to prevent evasion. Two, as India has successfully done over the past three decades or so, the Government needs to expand the tax base. Since the reforms in personal taxes, and introduction of GST, more individuals and firms file returns, and pay taxes. This is the best way to shore up revenues, compared to higher taxes.

Yet, the flip side is that higher taxes may be a simpler option to exercise, especially to combat the immediate revenue shortfalls. This is true for several reasons. Although India’s real GDP growth is on the upswing, and will be buoyant this fiscal year, the nominal growth is faltering. Since the fiscal deficit is calculated as a percentage of the latter GDP, India may miss the target. This may be unacceptable to the finance minister, who prides herself on maintaining the targets. The solution is either to seek extra revenues, or cut expenditure on welfare schemes. The latter is politically unpalatable.

According to a tax expert, who was quoted in a media report, “With the Government now having access to robust data trails through GST, CRS agreements, and other systems, policy-makers may continue to see surcharge adjustments as a relatively simpler option compared to asset-based valuation regimes.” The former is also a faster way to collect money compared to the latter, which requires a change in the system, and mindset related to taxation. Ironically, India will introduce a new taxation regime, which is expected to be more friendly, easier, and simpler than the previous ones, with fewer laws and clauses, and rules and regulations.

Hence, this may be completely a wrong time to hike taxes. The Union Budget 2026 will see a double tussle, one between the compulsion to raise revenues, and the other between the need to cut expenses. The latter may be difficult in this fiscal year, and may be easier in the next if the Government expects growth to drive up revenues. The former option is easy, and implementable immediately. This will be especially true after big incentives like zero tax on income up to INR 12,00,000 a year, and GST 2.0 reforms in September 2025.