India debates raising taxes on the rich ahead of budget
India debates raising taxes on the rich ahead of budget
In an off-the-record pre-budget meeting with Chidambaram and Finance Ministry officials on Jan. 7, some economists pressed for higher taxes on the rich to make sure they are paying their fair share, alarming business lobby groups that warn such a move would stifle growth.
The Indian finance minister's comments come against the backdrop of a global debate, from the United States to France, about whether the very wealthy pay enough taxes.
The growth rate of Asia's third-largest economy is widely expected to slip to a decade-low in fiscal 2012/13 as the government grapples with ballooning budget and current account deficits and high inflation. Chidambaram wants to plug holes in the nation's finances by cutting expenditure and increasing revenues through improved tax collection.
"I think we should have stability in tax rates but we should consider the argument that very rich should be asked to pay a little more on some occasions, but that is not the view I am expressing. That is simply the argument I have heard and I am repeating," Chidambaram said in a TV interview aired yesterday.
Chidambaram offered no definition of the "very rich", but his comments are likely to please many in his center-left Congress party who feel recent reforms to further liberalize the economy favor corporate India at the expense of the common man.
The Congress party is facing a tough fight to hold on to power in a series of state elections this year and general elections due by May 2014.
"It is good electoral politics but economically doesn't make sense," said Venugopal Dhoot, who controls India's diversified Videocon Group and ranks 38th in Forbes' India rich list with a net worth of $ 1.5 billion.
It was not immediately clear if Chidambaram was referring to higher taxes on income, assets or capital gains in a regime that currently makes India a good place for the rich to live.
At present the top income tax rate is 30 percent, which applies to earnings above Rs. 1.0 million ($ 18,500) a year. There are just 35 million taxpayers in a country of 1.2 billion people, and of them about 1.5 million declare annual earnings of more than Rs. 1.0 million, according to the Finance Ministry.
There is no inheritance tax, an issue Chidambaram raised as a concern after being appointed finance minister last August. In 2009, his predecessor withdrew a 10 percent surcharge on the 30-percent rate paid on earnings above Rs. 1.0 million.
A government official with direct knowledge of the debate in the Finance Ministry said the focus is on plugging loopholes in the collection of income tax paid by individuals and companies.
"There are options of revisiting the inheritance tax and surcharge on income tax paid by the individuals," the official said, declining to say if these were firm proposals on the table for the budget to be unveiled around the end of February.
"Even if they bring (back) the surcharge that will only add about Rs. 15-20 billion, which is a drop in the ocean and will be lost in the decline of tax revenues that will arise due to lower compliance if tax rates are raised," said Surjit Bhalla, chairman of advisory firm Oxus Investments.
India's richest people tend to own businesses and other assets and thus have comparatively little exposure to salaries tax. Billionaire Mukesh Ambani, for example, was paid salary and perks of Rs. 150 million ($2.8 million) in the last fiscal year by Reliance Industries, which he controls. According to Forbes, Ambani is worth $21 billion.
Similarly, Azim Premji, founder of India's No. 3 software exporter, Wipro Ltd., and India's third-richest person with a net worth of $1.2 billion, took home a salary and allowances of $84,696 in the last financial year, less than half of what the company's chief financial officer was paid.
Premji said at a gathering of business leaders in Davos, Switzerland, on Wednesday that in principle he was not against higher taxes for the wealthy.
A similar debate over taxing the well-heeled has played out recently in developed economies.
US President Barack Obama made it a central theme in his re-election campaign and won a political victory over his Republican opponents in getting Congressional approval for tax hikes on households earning more than $ 450,000 a year.
And French Prime Minister Francois Hollande's plan to hike taxes on income over 1 million euros made headlines after French actor Gerard Depardieu said he would move abroad.
Responding to Chidambaram's comments, wealth managers told Reuters India needed to focus more on compliance and increasing the tax net instead of raising rates for rich people.
Raising taxes on the rich would not make a significant impact to the tax-to-GDP ratio as a large portion of the wealth remains outside the mainstream system and is invested in real estate and gold or finds its way to tax havens, they said.
Iran sanctions shadow falls on smaller German banks
- Some German companies plan to press on with Iran dealings
- German exports to Iran rose 15.5 percent last year
Germany’s biggest lenders have shied away from business with Iran after past penalties for breaching US sanctions, but smaller banks have leapt on opportunities afforded by the nuclear deal rejected by Donald Trump.
There are just months to go until a November deadline issued by Washington after the US president abandoned a hard-fought agreement that loosened business restrictions on the Islamic Republic in exchange for Tehran giving up its pursuit of nuclear weapons.
But some firms plan to press on in their dealings with Iran despite the looming threat of penalties.
“We will continue to serve our clients,” for now, said Patrizia Melfi, a director at the “international competence center” (KCI) founded by six cooperative savings banks in the small town of Tuttlingen in southwest Germany.
The center, which supports companies operating in sensitive markets like Iran or Sudan, has seen demand “rising sharply in the last few years, from firms listed on the Dax (Germany’s index of blue-chip firms), from all over Germany and from Switzerland,” she added.
German exports to Iran have grown since the nuclear deal was signed in 2015, adding 15.5 percent last year to reach almost €2.6 billion ($3.0 billion) after 22-percent growth in 2016.
Such figures remain vanishingly small compared with Germany’s €111.5 billion in exports to the US — its top customer.
Nevertheless, the KCI will “wait and see what the sanctions look like” before turning away from Iran, Melfi said.
Already, firms dealing with Tehran must take great care not to fall foul of US restrictions.
Transactions are carried out in euros, and the KCI does not deal with businesses that have American citizens or green card resident holders on their boards.
What’s more, products sold to Iran cannot contain more than 10 percent of parts manufactured in the US.
One of the most important inputs for the business is “courage among our managers” given the high risks involved, Melfi said.
Germany’s two biggest banks, Deutsche Bank and Commerzbank, avoid Iran completely after being slapped with harsh fines in 2015 over their dealings there, with Deutsche alone paying $258 million in penalties.
DZ Bank, which operates as a central bank for more than 1,000 local co-op lenders, is withdrawing completely from payment services there, a spokesman told AFP.
That left KCI to seek out the German branch of Iranian state-owned bank Melli in Hamburg.
Even that linkage could break if Iran’s biggest business bank appears on a US list of barred businesses as it has before.
Meanwhile, among Germany’s roughly 390 Sparkasse savings banks, business with the regime is mostly limited to producing documents linked to export contracts.
“We will be looking even more closely at those” in the future, a person familiar with the trade told AFP.
Elsewhere in the German economy, the European-Iranian Trade Bank (EIH) founded in 1971 is another conduit to Tehran.
Also based in Hamburg, it for now remains “fully available to you with our products and services,” the bank assures clients on its website, although “business policy decisions by European banks may result in short term or medium term restrictions on payments.”
Neither does the Bundesbank (German central bank) believe that much has so far changed for business with Iran.
“Only the European Union’s sanctions regime will be decisive,” if and when it is changed, the institution told AFP.
Any payment involving an Iranian party would have to be approved by the Bundesbank if things return to their pre-January 2016 state.
German banking lobby group Kreditwirtschaft has called on Berlin and other EU nations to clarify their stance — and to make sure banks and their clients are “effectively protected against possible American sanctions.”
KCI’s Melfi said time is running out for EU governments to act.
“Many firms just want to stop anything with Iran, since they can’t calculate the risk of staying,” she noted.
On Friday for the first time since the Iran nuclear deal came into force in 2015, China, Russia, France, Britain and Germany gathered in Vienna — at Iran’s request — without the US, to discuss how to save the agreement.