The government has caused some anxiety among the middle class by suggesting the forthcoming Budget could tax the rich. The anxiety occurs because in India it is difficult to define the rich, in relative terms. Even someone earning R15 lakh to R20 lakh a year can be described as rich relative to the 500-million-plus earning less than $2 a day. Generally speaking, individuals earning about Rs 1.5 lakh a month see themselves as very middle class. I have heard them complain about LPG subsidies being withdrawn. Though it is entirely legitimate to ask this income category to make some sacrifices to provide extra welfare to the 500 million living under $2 a day, their stock response often is: “The government is wasting so much social welfare funds it already has, so why should we sacrifice more?” Remember, this is also the class which has on numerous occasions protested at Delhi’s India Gate over a whole range of issues since 2011.
Young, middle class urban Indians are also voting very aggressively as seen in successive assembly polls.
So, finance minister P Chidambaram is bound to be mindful of who he defines as rich in case he chooses to put a legitimate surcharge of 10% (additional tax of 3%) on a certain higher income category. A surcharge, by definition, is meant to be a temporary levy. The finance minister would not want to tinker with the three basic tax rates of 10%, 20% and 30% whose sheer simplicity was authored by him in 1997. By temperament, Chidambaram dislikes complex structures in tax design.
So, it is likely that he will keep nearly 97% of all individuals filing tax returns out of the ambit of “tax the rich”.
Of the roughly 33 million tax return filers, only 1.4 million show earnings of over R10 lakh a year. That means 95% of all tax returns are for incomes below R10 lakh annually charged at 20% tax rate. The finance minister need not disturb 95% of the current taxpayers paying 20% peak tax rate.
To levy a surcharge, he needs to just focus on the top 3% of the tax-paying population which is in the 30% tax bracket now.
Roughly the top 3% of the taxpayers may be contributing a little over R1,40,000 crore to the income tax kitty. These individuals will mostly be earning over R24 lakh a year. A surcharge of 10% (or 3% extra tax) in this category