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Arun Jaitley has little elbow room to tweak tax surcharge for super rich, companies
November, 24th 2014

The surcharge on the income tax outgo of rich individuals and the increase in it for businesses — brought in “just for a year” by former UPA finance minister P Chidambaram in FY14 — is likely to continue for the third year in FY16 with the Modi government inclined to retain it until its cash position improves.

Chidambaram had asked “the relatively prosperous” having an income of over Rs 1 crore and paying tax at the highest rate of 30% to “cheerfully” pay a 10% surcharge on their tax outgo. As a temporary measure in a year of financial difficulties, he had also increased the surcharge on corporate tax from 5% to 10% for domestic businesses with profits of more than Rs 10 crore a year. For non-resident businesses with same income, the surcharge was raised from 2% to 5%.

Sources in the government said the conditions under which the surcharges were brought in — growth rate way below the potential of 8%, underachievement in revenue receipts, especially in taxes, a poor tax-to-GDP ratio and high fiscal deficit — still remain. “Temporary measures only imply that these measures are on the government’s radar and are open to review. The review would be to ascertain whether the economic factors that led to those measures still exist or not,” explained a person in the know of things.

The economy grew at 4.7% in 2013-14, below the 5-5.5% forecast when Chidambaram announced the changes in the surcharge. The plan to reduce the fiscal deficit from 4.1% (projected for this year) to 3% (2016-17), relying on revenue mobilisation than on spending cuts, would constrain finance minister Arun Jaitley from letting go of any resources at this juncture. Jaitley did not choose to roll back the surcharges in his July 18 full-year budget for FY15.

The surcharge on personal income tax, along with applicable cesses, resulted in a maximum effective tax rate of about 34% for 42,800 affected individuals in the highest tax bracket. This brought their tax liability close to a new slab of 35%, which Chidambaram had proposed for the super-rich in his Direct Taxes Code. Jaitley had said on Saturday that he didn’t favour burdening the salaried and the middle-class with more taxes; rather, he would go after evaders to widen the tax base.

In the first half of this fiscal, the tax department collected roughly half of the Rs 7.36 lakh crore it wanted from personal, corporate and wealth taxes, but heavy refunds restricted net receipts to only Rs 2.7 lakh crore. Overall tax collection suffered on account of poor excise receipts that kept indirect tax

collection way below projected growth. The trend of expenditure overshooting revenue in the April-September period led to the fiscal deficit crossing 82.6% of the full-year estimate.

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