The budget papers contain facts that prove the Finance Minister wrong on the number of people whose taxable income exceeds a crore a year
Much has been said and written — mostly favourably — about the budget for 2013-14 presented by Union Finance Minister P. Chidambaram. His heavily ornamented speech led the electronic media to enthusiastically vote for his budget in less than an hour after he had presented it. The print media followed suit. “PC Taxes the rich to pay for the poor” claimed one. Another praising him for voting for growth and rated the budget at /. Most comments must have been written relying on only the Minister’s speech, without looking at the detailed budget papers which the Finance Ministry had put up in detail on its website fairly late in the night on February 28. When the Finance Minister’s speech does not truly reflect the budget documents he presents, it misleads. And that is precisely the case here — particularly on the most critical aspect of the budget, namely revenue raising.
What the figures reveal
Take the case of the surcharge levy on the “super rich” highlighted by the media. Has the Finance Minister really “taxed the rich” to raise resources as part of his “inclusive growth” ideal? Or is it an exercise in symbolism for politics? This is what he says: “Wherever possible, revenues must also be augmented. When I need to raise the resources, who can I go to except those who are relatively well placed in the society? There are 42,800 persons — let me repeat only 42,800 — who admitted to a taxable income exceeding Rs.1 crore per year.” He has levied a surcharge on them. First, his tally of the super rich seems to be far less than the 1,25,000 High Networth Indians [with investible wealth of $1 million (Rs.5.5 crore) plus house and durables] reported by KPMG International. Their income cannot be less than Rs.1 crore per year. Again, with the luxury car market touching some 27,000 cars a year, the number of super rich cannot be as low as 42,800. Next, are these the only ones from whom taxes can be raised? To test whether the Minister was being truthful here, one needs to only look at the facts tucked away in the budget papers which expose what his political symbolism conceals.
More than anyone else, he knows that in today’s corporate capitalist model — with, all over, 98 per cent of Indian corporates being family-owned and controlled — individuals and families hoard and enjoy their incomes through the corporates they control.
And see how these “rich” corporates are taxed in India. The statutory corporate tax rate of 32.5 per cent in India is among the lowest in the world — the United States [40], Japan [38], Argentina [35], Belgium [34] and Brazil [34] tax corporates more. But no Indian corporate pays tax even at the lower rate of 32.5 per cent. The Statement of Revenue Foregone [Annexure 12 to the Receipts Budget] laments that the effective rate at which the Indian corporates pay tax is almost 10 per cent less. And corporates that earn more than Rs.500 crore plus pay tax at sub 22 per cent. Does it mean taxing the rich? Or sheltering them? If all corporates pay tax at statutory rates, technically, tax revenues would be higher in 2013-14 by Rs.1,90,000 crore.
On taxes
The statement of revenue foregone laments that thanks to rebates granted, the effective tax realised is far less. It brings out that for the year 2010-11, the customs and excise duties foregone was 132 per cent of the tax realised, which means that for every Rs.100 of tax realised, the tax foregone was Rs.132. In the next year, 2011-12, it was worse. The tax foregone was 145 per cent of the tax realised, that is for every Rs.100 of tax obtained, the tax sacrificed was Rs.146. The total amount of indirect tax foregone for 2010-11 was Rs.3.65 lakh crore against Rs.2.75 crore realised. For 2011-12, the tax forgone was Rs.4.35 lakh crore against the tax of Rs.2.99 lakh crore realised. In direct taxes, the tax rebates for 2010-11 was Rs.94,928 crore and for 2011-12, Rs.93,640 crore. The total tax foregone for 2010-11 was Rs.4.6 lakh crore and for 2011-12, Rs.5.31 lakh crore. Had these giveaways been withdrawn, there would be no fiscal deficit at all. The budget document equates “tax foregone” to “tax expenditure,” implying that it is an expenditure that is not shown in the budget as such.
See how the Economic Survey for 2012-13 presented 24 hours before the budget speech laments the tax giveaways. Under the paragraph titled “Tax Expenditure,” it says: “As indicated earlier in the section on the collection rates, the magnitude of revenue foregone [tax expenditure] is indeed high.” It talks about the corporate tax foregone [Rs.57,192 crore for 2010-11] and Rs.51,292 crore for 2011-12]. It equally laments the indirect tax giveaways [Rs.2,12,167 crore in excise in 2011-12 and Rs.2,30,131 crore for 2010-11 and Rs.2,33,950 crore in 2009-10, in customs duty which is projected to rise to Rs.2,76,093 crore in 2011-12] The Survey concludes: “there is merit in limiting the exemptions or their grandfathering on a case-by-case basis so as to realise the fuller potential through wider tax base.” How misleading then is the Minister’s statement that he has to turn only to the 42,800 “rich” in the country for small add-on revenues. His own budget documents and the Economic Survey prove him wrong.
The alert Minister is not unaware of the huge giveaways. In his second innings as Finance Minister in 2007, he had indeed promised to scrap them. In a news report titled “Bye Bye Exemption: Tax Exemptions hits Govt’s revenue collection, PM promises action,” India Today Online [February 12, 2007] said: “Buried in the voluminous budget documents is a startling disclosure: for every two rupees the Government collects in taxes, it forgoes one” by way of tax giveaways. It pointed out that in 2004-05, against the tax [Rs.3,03,037 crore] collected, the exemptions robbed the government of Rs.1,58,661 crore. The report charged that, thanks to lobbies, successive governments had doled out exemptions, of course in the garb of incentivising a sector or attracting investments to a backward region. The report said that “last year, the big boys (companies with taxable income of more than Rs.500 crore) milked exemptions to pay 16 per cent in taxes,” well below the normal rate of 33 per cent.
The magazine had quoted Mr. Chidambaram as saying “subsidies for poor should continue, exemptions for rich scrapped.” And supporting him, Prime Minister Manmohan Singh also said, “Our tax regime should not have too many exemptions.”
But the budget proves that both of them have conveniently forgotten their promise. And now eight years down, the giveaways, far from being scrapped, have more than doubled from Rs.2.35 lakh crore to Rs.5.73 lakh crore. Turning a blind eye to these elephantine sums, Mr. Chidambaram says he has only to look at the 42,800 rich for levying surcharge for a few thousand crore. Of course he was right in taxing them as their tax rate is low. The question is: why did he not scrap the giveaways worth lakhs of crores enjoyed by the corporates as he had committed to do in 2007? That could be the game changer not only for the government and its balance sheet but also for the national economy. Are the Finance Minister and the Prime Minister listening?
(S. Gurumurthy is a chartered accountant and corporate consultant.)
Keywords: political symbolism, Gurumoorthy, Tax Exemptions, P. Chidambaram, Union Budget 2013, Union Budget highlights, Budget 2013, Budget reaction 2013
I can't believe that in this big country on 42, 000 people recieve about one crore anually
I think many have missed out the operative word in PC's statement:
" who admitted to a taxable income exceeding Rs.1 crore per year.” Not every is admitting to a high income whilr filing their tax returns and many may be showing losses through other means and hence their total taxable income becomes less than 1Cr.
Also owning luxury cars, Gold and Diamonds need not necessarily mean that they are in the HNI bracket. GOld and Diamonds are investments made over the years and not shown while filing returns every year. Also, luxury cars are available on loan nowadays to all.
As always, excellent analysis by Gurumurthy. Now that, based on his
perception and information he thought correct, FM has revealed there
are ‘only’ 42,800 persons in India who admitted to a taxable income
exceeding Rs1 crore per year, let us help him to take the issue
forward. As privacy and secrecy issues will prevent FM from giving out
the names of these 42,800 persons, he should arrange to prepare a
district-wise list of these individuals and provide to each District
Magistrate/Collector the number (only the number) of rich people in
the respective districts who have annual income exceeding Rs1 crore.
Collectors should be asked to make ‘discreet’ enquiries and report
‘who’ these persons could be and who all are likely ‘omissions’ in the
list. Quite possible, GDP may not grow at the expected growth rate,
but, next year (2014), FM will be able to give a decent six-digit
figure against the 42,800 he included in the current Budget Speech.
As an accountant Mr.Gurumurthy is numerically very accurate. Though disputable, he may also claim credit for his economic propositions that he says as the overlooked 'Game Changers'. But is he in political game expecting his Opposite Team to take his tactical tips? That will happen only if the Match is fixed! Why has his team not ensured such game changers when they were serving? 'Radical correction' proposals that are not pragmatic should not be hurled just for the sake of sensation that it creates in the pretext of an analysis. How can such an open secret be a startling thing for SG. People know much about the open secrets of our economy nowadays and so they expect much more from an analysis.
Is tax exemption a well thought policy decision or its being done at the pretext of such policies like promoting development of some particular region, sector etc. ?
I am trying to understand whether the Govt. is deliberately doing it to achieve something good or its sheltering super rich, as mentioned in article.
Further, can anyone provide comparitative data of other countries like US, Russia and other BRICS nations.
Opinions and thoughts welcome!
One can find more than 10,000 super rich persons in T. Nagar and another 25,000 in Mount road. The tax net has to be widened.
I am sorry but I think the author here is missing the whole point the Finance Minister is trying to make - the 42800 figure is intended to shock India - this is on paper the taxable population reporting 1 crore+ of income in a year. The other side of this
story is to highlight the millions of 1 crore_+ HNIs who choose NOT to pay their taxes and contribute their fair share of the tax receipts in the country. This is unreported income in our country - fudged and baked into Swiss accounts, false balance sheets and home mattresses. FM should have committed funds to establish a national compliance cell that will have the best of technologies and data analytics to ensure we track down tax evasion and achieve the goal of increasing tax collections. Instead the FM chooses to punish
the honest ones who are actually reporting their incomes of 1cr+, charge more for eating out and whole bunch of gimmick taxes that will only promote even more tax avoidance and not move the needle on collections.
Stop the exemption for the rich; increase the subsidy for the poor should be the motto. Authour articulated the things openly; corporate tax rate has to be increased when compared to other developing countries. What will happen when we increase the corporate tax rate? More corporates are rising in India. The methodologies, the salary structure, the lavish life spent are more examples of corporate style. Still in India, we are not sure whether this low rate gets paid properly? Apart from this, it boils when exemptions granted for BIG BOYS as pointed by the authour. Coporates help in bringing foreign investment, FDI, Cross currency trading etc, But when it comes to the revenue, they are the most prominent persons to be addressed. Also, The magic figure 42,800 needs proper evaluations. PM and FM are economists who know better than us but, why this system of corruption still prevailing is not sure.
This is a veru facetious argument. Raising corporate taxes is not going fetch us much. We need to bring in more HNI and practicing prefessionals under the tax ambit. IF it is so simple why didnt the BJP during its tenure at the centre not increases Corporate taxes. It is a accepted fact that tax compliance increase when Tax rates goes down. The need is to widen the tax net by using multiple databases which the govt has. Not by increasing tax rates.The benefits given to Investment should act as multiplier and spur investment in new projects. The biggest problems is runaway inflation primarily due to supply side Constraints. What is needed is clear debottlenecking driven by investments.
I was shocked to hear that only 42800 people are earning more than 1 crore. The
government needs to investigate as early as possible to raise the tax revenue and help the
needy. The lawyers, the doctors (who never gives bill for the consultation) have to be
instructed to issue a bill for the fees they are collecting. Even public has to be given
awareness to ask for a bill for the amount they are paying. They should be educated about
their rights to ask for the bill for any amount they are spending. One more thing strikes my
mind while I am typing this comment. Every day in the news we are hearing about the theft in
various parts of India which mostly states that more than 50 sovereign gold lost, 10 kg silver
lost and also cash. While investigating those cases for the theft there is one more thing the
police should ensure that whether they are paying their taxes. I hope for the better results.
Stupid as it may seem, but its actually very difficult to get an exact
on the super rich or even the rich. Main reason being, people
undervaluing their income so as to get lesser taxes.
I have seen 90% of employed people around me, making fake rent
receipts to cut taxes. I have seen most of the businessmen, who earns
more than half a crore an year, giving almost no taxes.
So its not just the fault of government, but its also the collective
fault of people.
As Mr. Iyer has pointed out, the FM pointedly used the word "admitted".
The article also uses a still from the Google Hangout conducted in which he clarifies this point even further.
I appreciate that the writer feels passionately about this, and I am glad (s)he has chosen to enlighten us on his/her viewpoint. But readers of The Hindu expect a better analysis, and presented in a more moderate and measured tone.
Indeed an eye opener article so thanks for that.
And for my dear friend Mr. Rajeev commenting in favour of the FM below, the policies FM makes must comply with reality and facts that it will be only include 42,800 so why has he not claimed that ? Either he's unaware of wants to hide this fact so in both the cases he's to be felt guilty.
India being ruled by the Businessmen is the most lame statement to make and shows the culture of accepting way of life attitude in India. The person in power must demostrate doing justice to his role. if you can't drive change, for the betterment of the society (the role for which u are paid and appointed) then you should quit rather then misleading the masses for speaking in their interest when it's actually the other way round!!
The figure of 42,800 rich persons stated by the FM represents less than
0.004 per cent of population, which seems illogical. If this is true
then it is a clear case of Tax evasion and presence of black money in
the country. This figures also excluded a number of politician who are
real super rich in India. The list of Forbes richest persons in the
world includes several Indians. If everyone properly declares their
incomes and pay taxes then this problem of twin deficit could be solved.
While tax exemptions by themselves are wrong, tax rates quoted by the author are nowhere relevant. The knowledgable Mr. Gurumurthy seems to have never heard about Delaware or Cayman Islands. So, symbolism it may be, Mr. Chidambaram should be praised for raising the important topic of taxing the rich.
Mr. Gurumurthy is even more into technicalities. How about reform of forcing Real Estate earnings through formal channels? Or Jewellery retailing or for that matter Educational Institutions? And we have not yet touched agriculture!
Sorry Mr. Gurumurthy! Shoddy job. We expected better from you
The article quotes the Finance Minister as saying that only 42,800 ADMITTED to a taxable income of over 1 crore. So he has not claimed that 42,800 is the number. Yet the article then continues as if he did. What logic is that? Let's not argue just for argument's sake.
There may be lots to oppose Mr. Chidambaram on if you indeed want to oppose him, depending on which side of the political line you see yourself. But on most hard facts and choice of words, he is superior than most of his ilk. He is also a lawyer, lest we forget, so he does choose his words carefully. When he says something, he usually is right.
As for the effective tax rates of large corporates being far less than what it should be, that is simply plain fact which cannot be changed, because as we all know, India is ruled behind the scenes by the businessman. Unless and until you have a totally socialist set-up led by totally uncorrupt people (ha ha - that's utopia), that fact (business being king) will never change.
Yes; on hearing this news item, the first thing came to mind was this;
only so much. Even an illiterate layman, walking along the city roads,
looking the many luxury buildings and a number of cars for the same
family, staying in star hotels may know that their income cannot be less
than a crore per month. Cine field, even though the income is not steady
is another. Other fields need not be mentioned, and we are told like
this by the finance minister.
Gurumurthy is correct. Our corporate houses do not even pay taxes at the 32 per cent rate but escape through various loopholes. It is laughable for the Finance Minister of the country to suggest that there are only 42,800 people with income over 1 crore. There would probably be that many in Chennai city and suburbs alone!
As usual well researched article by Sri.Gurumurty.I think the figure
of 42800 is of those individuals, who are not actively patronising the
congress.Further, with the General elections around the corner,
congress has to raise party funds.This is a better way to convince
the super rich that congress cares for them and not the AAM AADMI and
raise funds from the super rich.Of the HNI of 125000 reported by KPMG
international, 42800 pay the surcharge to Govt and the balance pay the
protection money to congress. considering an average of Rs1.00 lac
collected from each one of them, congress party will be richer by 7500
crores. Is it not an ideal budget for the election year for the congress?
This is a very lazily written critique of the budget.
To pick just one item of laziness: " "...There are 42,800 persons — let me repeat only 42,800 — who admitted to a taxable income exceeding Rs.1 crore per year.” He has levied a surcharge on them. First, his tally of the super rich seems to be far less than the 1,25,000 High Networth Indians [with investible wealth of $1 million (Rs.5.5 crore) plus house and durables] reported by KPMG International. Their income cannot be less than Rs.1 crore per year. Again, with the luxury car
market touching some 27,000 cars a year, the number of super rich cannot be as low as 42,800."
If the writer had actually listened to the FM, he'd have noticed that the FM brought out that particular statistic to highlight the incongruence between "declared" wealth- declared, for tax purposes- and actual wealth in India.
Even an armchair economist such as myself understands this difference.
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