I had barely finished my lecture in support of Tax on Super Rich, when this gentleman sprang up from the audience and asked me how the finance ministry will define “Super Rich” in India. I managed to answer his question by reminding him that certain issues should be left to the mandarins at the ministry.
But the gentleman’s question kept haunting me – How do you identify “Super Rich” in India?
The cat was set among the pigeons by the Union finance minister P Chidambaram when he indicated that the government might bring in some form of additional taxation for India’s super-rich. “We should consider the argument whether the very rich should be asked to pay a little more on some occasions,” he said.
Obviously, the Indian super-rich being upset at this idea registered their protests and some even said it would hurt entrepreneurship and in turn will halt economic development of the country. While Azim Premji remained the lone voice in support of taxing the super-rich.
Before we get into this controversy of right and wrong, fair and unfair, let us try and understand the numbers we are dealing with. According to the Finance Ministry data (for the year 2011-12), India has only about 400,000 taxpayers who earn more than Rs 20 lakh as income and pay taxes. This group accounted for around 63% of the taxes collected by the government and constituted only a miniscule 1.3% of the total taxpayers.
The above statistics clearly indicate that there is a huge amount of inequality in tax collection, which necessarily does not mirror the pattern of wealth distribution in India. Nobody will believe that India has only 400,000 super rich who earn more than Rs 20 lakh annually – they would feel the number of super rich is much higher. And they are absolutely right. The only problem is that India has only 400,000 honest super rich and the rest are the dishonest super rich.
The proponents of tax on super rich have constantly harped on the “ability to pay” canon of taxation in support of their demand. But what they are missing out is that in a country like India where the dishonest super rich outnumber the honest super rich by a large number, mindless application of this cannon of taxation would only act as a disincentive for the super rich to accumulate wealth. At the best this would trigger a migration of the honest super rich to the dishonest club.
The numbers clearly indicate that the entire debate of taxing the super rich is quite worthless. Time and energy would be better spent in framing policies, which would help in converting the members of the dishonest super rich club into members of the honest super rich club.
It is only once this conversion is complete should the nation debate a tax on super rich.