Chidambaram may use Morton’s fork to make rich pay

February 22, 2013

(Any opinions expressed here are those of the author and not of Reuters)

The countdown to Budget 2013 has begun, and Finance Minister P. Chidambaram must try to keep India’s fiscal deficit from gaining weight.

One idea we’re hearing a lot lately is turning to India’s super-rich citizens to boost tax revenue and improve the tax-to-GDP ratio. In a television interview aired in January, Chidambaram’s comments on the subject didn’t reveal much, but led to media speculation over higher taxes for the well heeled.

It’s a step that may lead the Harvard-educated lawyer down a path that John Morton took more than 500 years ago. The 15th-century lord chancellor in the court of the English King Henry VII, not to mention former archbishop of Canterbury, is traditionally credited with “Morton’s fork”, a taxation principle that ensnares the rich and poor alike.

It goes like this: frugal people must have enough money left over to give generously; people who live extravagantly must be prosperous enough to give generously too.

It’s too bad for Chidambaram that his name isn’t Morton. He will find it harder to get India’s millionaires to put their money to work for the good of the state.

How many rich people are we talking about? India has just 35 million taxpayers — about 3 percent of the population. Only 1.5 million of them declare annual earnings of more than a million rupees ($18,500). Fewer still (400,000) pay tax on earnings of over 2 million rupees ($37,000). With all that talk of India’s growth spurt in recent years, that number does seem low — as this blogger points out.

In a survey by the Reuters India website this month, 47 percent of the respondents said those earning more than 10 million rupees a year (the magic “1 crore” mark, or about $184,000) should be taxed at a higher rate.

At present, the top income tax rate is 30 percent, which applies to earnings above 1 million rupees a year.

But a Standard Chartered report on this week said taxing the rich has “uncertain economic benefits”.

“Such a measure would run the risk of higher tax evasion and create a disincentive to work and invest in an economy where growth rates have come down substantially,” the report said.

That’s what HDFC Bank Managing Director Aditya Puri says too: it could prove counter-productive and lead to evasion.

And what if India’s rich people move to tax havens? There’s plenty of precedent, from French film star Gerard Depardieu to the Rolling Stones.

There are no easy answers, but luckily for us, Chidambaram only has until Feb. 28 to think about it. We’ll be looking forward to his decision.

One comment

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Yes indeed there are no easy answers! But hopefully the higher tax on the rich is reasonable, so there is no evasion and also the money collected gets used in infrastructure development. To start with I will love to see better roads and cleaner Delhi. I hope all this increased money doesn’t go in the pockets of corrupt politicians :( and scams.

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