Every crore of income to give govt almost Rs 5 lakh from super rich tax a person

Revised DTC likely to propose 5% extra tax over present max tax of 30% on those earning over Rs 10 crore

The government plans to bring in the super rich tax in a statute through the Direct Tax Code to get extra funds for the exchequer. The usual curiosity arises as to how much the exchequer gains because of the additional tax. The revised DTC bill proposed to be taken up by the Cabinet today is likely to propose 5% extra tax over the present maximum tax of 30% on those earning over Rs 10 crore.  

The government in this year's budget had imposed a surcharge of 10% on those earning over Rs 1 crore a year. Finance Minister P Chidambaram had disclosed that there are 42,800 people such people in India.

Assume that this additional 5% tax would have come on those earning over Rs 1 crore a year. Till Rs 10 lakh (assuming the present tax slabs remain unchanged) there would be no change in the tax rate. In the remaining Rs 90 lakh, an additional sum of 5% of taxable income would come to kitty. This means Rs 4.5 lakh a person in a year, assuming he has not saved anything through long term investment. In total, 42,800 people would have given Rs 1,926 crore in first Rs 1 crore of their earnings.

Over Rs 1 crore, every additional income of a crore of rupees would yield exchequer Rs 5 lakh a person or Rs 2,140 crore in totality.

However, these tax receipts would be less as 5% tax is coming on those earning over Rs 10 crore a year.

Kotak Wealth Management and Crisil Research had given a figure of 62,000 high networth individuals as on 2010-11. In a report on Top of the Pyramid-- Decoding the Ultra HNI, the two agencies have defined HNIs as those whose minimum average networth was Rs 25 crore. This gets mapped to a minimum income of Rs 3-4 crore.

If additional 5% tax comes on these individuals, it would give the exchequer Rs 19.5 lakh (Rs 4.5 lakh in first crore of rupees and Rs 5 lakh in every crore of rupee thereafter) for those earning up to Rs 4 crore. As many as 62,000 people would mean Rs 21,390 crore additional income for the exchequer for income up to Rs 4 crore. In reality, the additional sum for the kitty would be greater as the people might be earning more than Rs 4 crore as well.

However, the sum would decline to the extent of reduction in the number of people in a bracket of those earning over Rs 10 crore in a year compared to Rs 3-4 crore.

Here it should be noted that even though the Cabinet passes the DTC bill today and it is tabled in this session of Parliament, the law will take time to be enacted, even if one assumes that there is a majority in its favour. So, the Code, to replace Income Tax Act of 1961, is not going to come this financial year, but may be in 2013-14 financial year. The relief to the government, which has targeted to rein in the Centre's fiscal deficit to 4.8% for this fiscal, will not come for 2013-14. For the next year, the target is to cut the deficit to 4.2% of GDP.