With the Budget round the corner, most of us are hoping for lower income tax rates or more liberal tax slabs. But wealthy folks would be quite happy if the fnance minister does nothing to tax slabs and decides to hold the surcharge instead.
What is it?
‘Surcharge’ is an additional charge or tax levied on an existing tax. Unlike a cess, which is meant to raise revenue for a temporary need, surcharge is usually permanent in nature. It is levied as a percentage on the income tax payable as per normal rates. In case no tax is due for a financial year, then no surcharge is levied. The revenue earned via surcharge is solely retained by the Centre and, unlike other tax revenues, is not shared with States. Collections from surcharge flow into the Consolidated Fund of India.
Currently, wealthy individuals and companies are liable to pay a surcharge on their tax outgo. Individuals earning a taxable income of over ₹1 crore have to shell out a surcharge amounting to 15 per cent of their tax outgo. So, if your taxable income is ₹1.2 crore, your income tax payable works out to ₹34.25 lakh. The 15 per cent surcharge will be computed on this amount, at ₹5.13 lakh. Thus, the total tax payable is ₹39.38 lakh without including cess.
Partnership firms earning over ₹1 crore in taxable income pay a surcharge of 12 per cent. Domestic firms earning ₹1 crore to ₹10 crore pay a 7 per cent surcharge and those earning over ₹10 crore pay 12 per cent.
Why is it important?
Surcharges, in India, are used to make the taxation system more ‘progressive’. They are used to ensure that the rich contribute more to the tax kitty than the poor. Traditionally, the assumption has been that companies can pay higher taxes than individuals and corporate taxes have been subject to surcharge.
In the 2013 Budget, a 10-per cent surcharge on super-rich individuals was introduced by the UPA government. It was thereafter hiked to 12 per cent by the NDA in the 2015 Budget. In 2016, the rate climbed to 15 per cent. Increases in surcharge are usually easy to push through than across-the-board increases in tax rates, as they only impact a small, more affluent segment.
Why should I care?
Individuals are subject to highest levy of surcharge compared to other tax payers. So if your total taxable income exceeds ₹1 crore, you must brace for much higher tax outgo. The surcharge levied is not eligible for any deductions or exemptions. If you are a high income earner, you must keep surcharge in mind when jumping jobs or negotiating for a pay rise. The moment your income exceeds the magic number of ₹1 crore, your tax outgo will shoot up. Considering the heavy burden, tax laws provide something called ‘marginal relief’ to super rich tax payers. This provision is designed to make sure that the increase in income tax due to surcharge is not higher than the actual increase in income. In such cases, the surcharge is restricted to the increased income.
To claim the marginal relief, your incremental tax should be greater than the income earned beyond ₹1 crore. For instance if your income is ₹1,01,00,000, your tax would be ₹28,55,000. The surcharge on this works out to ₹4,28,250, taking your total outgo to ₹32,83,250. Here, the extra tax (₹4.28 lakh) is greater than the extra income earned beyond ₹1 crore (₹1 lakh). Once you claim marginal relief, your surcharge will be restricted to ₹1 lakh.
The bottomline
Levying surcharge on the wealthy is fine. But the concept mustn’t be stretched so far that the super-rich find smart ways to skip taxes altogether.
(The article first appeared in The Hindu BusinessLine.)