The much-debated tax on the super-rich is unlikely to make its debut in the upcoming budget with most policymakers within the government favouring more deliberation on the matter and stressing the need not to ruffle business sentiment. Revenue raising measures in the budget are likely to be limited to expanding the tax base and measures to boost growth.
The feeling among policymakers is that such a tax will adversely impact fragile business sentiment and was therefore not desirable. "There is need for some more discussion on it. The rich are also known to have greater ability to shift incidence," said a government official privy to the deliberations on the issue. "It needs to be studied on what the tax can achieve in terms of revenues and how it can be administered effectively.
There is a strong view in favour of studying it intensely," the official, who did not wish to be identified, told ET.
Chidambaram, however, is likely to focus on measures that expand the tax base. "The idea is to take measures that will not damage sentiment but contribute to revenues," another official said.
A slew of tax measures introduced in the last budget, notably the retrospective amendment and the general anti-avoidance rules, had a hugely negative impact on investor sentiment and the government does not wish to repeat the experience. The government had to dilute many of the key provisions in the last budget including the general anti avoidance rules.
The retrospective law to tax indirect transfers is likely to be amended in the forthcoming budget to soften its impact. Policymakers within the government are of the view that even a small pick-up in growth would provide a big boost to government revenues that a revenue raising measure itself would be unable to.
India taxes income at three rates - 10%, 20% and 30%. Finance minister P Chidambaram had fixed these rates in 1997 budget, widely acclaimed as the dream budget. But, the country with a population of 100 crore has just 3.5 crore taxpayers who contributed about 1.7 lakh crore to the exchequer in the last fiscal.
There has been a raging debate in the country in the run-up to the budget on the desirability of a higher tax rate on the rich. While a number of economists and WiproBSE 2.43 % chairman Azim Premji have supported taxing the rich at a higher rate, there are some who have termed the move as counterproductive.
"Following the principle of progressivity, that is higher tax rates for high income group, a widening of the tax base and effective enforcement of tax laws to penalise those who hide their income and pay less tax as well as those who despite high income do not pay any tax at all," a group of leading economists had told Chidambaram at a pre-budget consultation.
Some experts also term high tax rates as regressive. "If you go back in the last 50 years, in any country, it has proved counter-productive. If you are charging the super-rich more, they know how to do their tax planning and you only lead to an evasion," Aditya Puri, managing director, HDFC BankBSE -0.95 % had said on the sidelines of an event.
However, taxing the rich has certainly found some traction globally. US President Barack Obama made it a central theme of his re-election campaign and succeeded in getting Congressional approval for tax hikes on households earning more than $450,000 a year. French Prime Minister Francois Hollande's plan to hike taxes on income over e1 million euros made headlines but has since stalled after the constitutional court struck it down.