India Budget Taxes the Rich

NEW DELHI--India Thursday joined the ranks of several developed countries which have recently raised taxes for the rich, saying it will impose an additional tax on the country's super-wealthy.

Brent Lewin/Bloomberg A sign reading "Pay Your Tax" sits outside the income tax office in Kolkata, India, in this file photo.

Indian Finance Minister Palaniappan Chidambaram, while announcing the federal budget for the financial year starting April 1, proposed a so-called surcharge which would push the effective income tax rate for a select group of taxpayers to around 34% from the current 30.9%, according to tax experts.

The additional tax will apply only to those taxpayers who have an annual taxable income of more than 10 million rupees (about $187,000), whom he said numbered only 42,800 people, according to tax returns.

Also, the additional tax will be in force only for one financial year, between April 1, 2013, and March 31, 2014.

The proposal has to be passed by India's parliament before it becomes law.

Late last year, the U.S. increased the income tax rate to 39.6% from 35% for individuals who have a taxable income of at least $400,000, or couples with at least $450,000.

France increased the income-tax rate of people in the highest bracket to 45% from 41%, and proposed an additional tax on income above 1 million euros ($1.3 million) a year.

Unlike these countries, where the tax increases affect a large section of the population, India has taken a kid-glove approach.

While introducing the additional tax, Mr. Chidambaram appealed to the charitable disposition of the 42,800 top taxpayers.

"I am confident that when I ask the relatively prosperous to bear a small burden for one year, just one year, they will do so cheerfully," Mr. Chidambaram said.

He estimated that the additional surcharge, and other direct tax initiatives, such as a withholding tax of 20% on profits distributed by unlisted companies to shareholders through a buyback of shares, will help the government raise a total of 133 billion rupees ($2.5 billion.)

Tax experts say that while the additional taxes will help somewhat, the finance minister has not addressed the bigger problem facing India: widespread tax-evasion.

Only 35 million people among the country's 1.2 billion-strong population file tax returns, and any tax increases are borne by the same small set of individuals.

"My question is: what have you done to increase the tax base?" asked Sudhir Kapadia, national tax leader at consulting firm Ernst & Young in India.

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