When Modi 1.0 announced demonetization in 2016, some middle-class Indians rejoiced. They thought the black moneyed super rich would finally be taken to task. On July 5, middle-class Indians had a similar feeling as Nirmala Sitharaman slapped enhanced income tax surcharge on the super rich.
Though Sitharaman in her maiden Budget did not give any major tax benefit to the middle-class, she has in effect won their hearts by 'taxing' the rich. Super rich will have to pay upwards of Rs 15,000 crore as they gulp down this bitter pill for the sake of 'Nation Development'. There is no change in personal income tax slab for middle-class Indians.
However, the surcharge that the rich have to pay has seen an increase. "...in view of rising income levels, those in the highest income brackets, need to contribute more to the nation’s development. I, therefore, propose to enhance surcharge on individuals having taxable income from Rs 2 crore to Rs 5 crore, and Rs 5 crore and above so that effective tax rates for these two categories will increase by around 3 % and 7 % respectively," Sitharaman said in her Budget speech.
The surcharge proposed to be levied on those having taxable income of more than Rs 2 crore but up to Rs 5 crore will be at the rate of 25%. Earlier, this was 15%. This equates to a steep 10 percentage point hike. Effectively, this segment of rich people will now pay 39% income tax compared to 35.88% income tax earlier.
For those with taxable income of more than Rs 5 crore, the surcharge proposed to be levied at 37% compared to 15% previously, meaning a 22 percentage point hike. This effectively means that these super earners will pay income tax at 42.7% rate compared to 35.88% earlier.
"Increase in surcharge on income tax for HNIs would affect 60,000 assessees and raise Rs 15,000 crore to Rs 18,000 crore over the year going by statistics for Assessment Year 2017-18," says Dhiraj Relli, MD & CEO, HDFC Securities.
Some are calling the surcharge hike a negative thing for markets. "The biggest dampener of market sentiment was for the HNIs where surcharge on personal income tax was increased," says Dinesh Rohira, Founder and chief executive officer at 5nance.com.
Some experts are surprised. "The increase in effective tax rate on high net worth individuals (those earnings more than Rs. 2 crore annually), and especially for the super rich (those earning Rs 5 crore and above annually)—where effective tax rate has been increased by 7%, has been a surprise move," says Sampath Reddy, CIO, Bajaj Allianz Life.
ETFs, buyback tax
Meanwhile, the finance minister has talked about using the ELSS (tax saving MF) for Exchange Traded Funds (ETFs) to raise disinvestment proceeds.
“The government has laid steep revenue target on disinvestment. CPSE ETF has been successful to a large extent and the government is looking for greater participation from the general public on this account. Hence, the government will offer an investment option on lines of ELSS (tax breaks) for ETF investing in CPSE’s. This should encourage long term investments in CPSE’s and also provide an alternative investment option to the retail investor which is tax efficient.
The government would also concession on STCG tax in addition to extending concession on LTCG tax on FoF set up for disinvestments in CPSE’s," says Akhil Mittal, senior fund manager, Tata Mutual Fund. Disinvestment is a stated priority, and extending tax incentives to retail investors in CPSEs oriented ETFs will provide a big push to this category, hopefully, both for equity and debt ETFs, according to Radhika Gupta, Chief Executive Officer, Edelweiss Asset Management.
The government has proposed tax benefits for mutual funds in IFSC in GIFT City and also on income distributed by mutual funds derived from transactions on stock exchanges set up in such IFSC in Gift city. This looks good visionary step but might not translate to immediate actionable, as per Mittal. Separately, the Union Budget proposed tweaks in taxation for stock buybacks. Exemption enjoyed by the shareholder of a listed company on income arising on account of buyback of shares has been withdrawn with effect from 5th July 2019.
"Simultaneously, a listed company is now required to pay tax on buyback under section 115QA at the rate of 20% plus applicable surcharge and cess," says Ashok Shah, Partner, N A Shah Associates LLP. Effect of this provision is that a listed company whose buyback is still open today would be taxed at the rate of 20% plus surcharge and cess on the amount of consideration paid less issue price of such shares. This would impact buyback by all listed company in future, he added. (The author is a journalist with 14 years of experience)