![[India] High earner tax increase could cause fund flight](http://globalpayrollassociation.com/cdn/shop/articles/bigstock-Three-Indian-Businessmen-Worki-294581476_1200x.jpg?v=1564648974)
The former Reserve Bank of India (RBI) governor - Bimal Jalan - is warning that higher income taxes introduced by the government in its budget could trigger a flight of funds from the country, live mint reports.
"In theory, if tax rates are very high, obviously people look for other countries, which have lower interest rates, and also exemptions from income tax," Mr Jalan said. He is the chair of a central bank panel tasked with deciding how much of the RBI's reserves should be transferred to the government.
Finance minister Nirmala Sitharaman increased taxes on people earning more than 10 million rupees ($145,000) a year to a minimum 42.7 per cent, in her budget this month. The increase also affects foreign portfolio investors registered as trusts.
Analysts and traders reportedly cite this as a key reason for foreign investors were net sellers of more than 30 billion rupees of funds from Indian equity markets in July, after foreign investments of over 100 billion rupees in June.
India's BSE index suffered a steep fall of more than 4 per cent to 37,686.37 since July 1. The budget was passed by parliament last week.
At present Indian workers with an annual taxable income of more than 1 million rupees pay 30 per cent of their earnings as income tax plus an additional 4 per cent on the amount of taxes paid.
Under the new budget, people and trusts earning over 5 million rupees a year will pay an additional 10 per cent surcharge. The surcharge will be 15 per cent for those earning more than 10 million rupees.
Speaking to Reuters, Mr Jalan said, "The incentive to borrow or invest domestically is certainly impacted by higher taxes. So investors may be sending money overseas but hopefully, it does not lead to round-tripping," in reference to funds exiting only to later return and evading taxes by this practice.
India’s corporate tax rate remains one of the top 10 highest globally, despite Sitharaman reducing it from 30 per cent to 25 per cent for companies with annual sales under 4 billion rupees.
There is a belief among some economists that high corporate taxes are one of the reasons for the sluggish private investment that has taken India's economic growth to a 5-year low.
Mr Jalan addressed a highly-debated plan to issue overseas sovereign bonds, saying he thought it would be relatively risk-free, as long as the government sold securities with 15 years and more to maturity.
"I don’t think foreign sovereign bonds make us more vulnerable. Our foreign exchange reserves are good, the current account deficit is low and inflation is low... It has to be long-term borrowing and not short-term borrowing," he said.
The proposal faced criticism from other former RBI governors Raghuram Rajan and Y Venugopal Reddy and from allies of the ruling Bharatiya Janata Party. They argue it could create long-term economic risks by exposing the government's liabilities to currency fluctuations.
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The former Reserve Bank of India (RBI) governor - Bimal Jalan - is warning that higher income taxes introduced by the government in its budget could trigger a flight of funds from the country, live mint reports.
"In theory, if tax rates are very high, obviously people look for other countries, which have lower interest rates, and also exemptions from income tax," Mr Jalan said. He is the chair of a central bank panel tasked with deciding how much of the RBI's reserves should be transferred to the government.
Finance minister Nirmala Sitharaman increased taxes on people earning more than 10 million rupees ($145,000) a year to a minimum 42.7 per cent, in her budget this month. The increase also affects foreign portfolio investors registered as trusts.
Analysts and traders reportedly cite this as a key reason for foreign investors were net sellers of more than 30 billion rupees of funds from Indian equity markets in July, after foreign investments of over 100 billion rupees in June.
India's BSE index suffered a steep fall of more than 4 per cent to 37,686.37 since July 1. The budget was passed by parliament last week.
At present Indian workers with an annual taxable income of more than 1 million rupees pay 30 per cent of their earnings as income tax plus an additional 4 per cent on the amount of taxes paid.
Under the new budget, people and trusts earning over 5 million rupees a year will pay an additional 10 per cent surcharge. The surcharge will be 15 per cent for those earning more than 10 million rupees.
Speaking to Reuters, Mr Jalan said, "The incentive to borrow or invest domestically is certainly impacted by higher taxes. So investors may be sending money overseas but hopefully, it does not lead to round-tripping," in reference to funds exiting only to later return and evading taxes by this practice.
India’s corporate tax rate remains one of the top 10 highest globally, despite Sitharaman reducing it from 30 per cent to 25 per cent for companies with annual sales under 4 billion rupees.
There is a belief among some economists that high corporate taxes are one of the reasons for the sluggish private investment that has taken India's economic growth to a 5-year low.
Mr Jalan addressed a highly-debated plan to issue overseas sovereign bonds, saying he thought it would be relatively risk-free, as long as the government sold securities with 15 years and more to maturity.
"I don’t think foreign sovereign bonds make us more vulnerable. Our foreign exchange reserves are good, the current account deficit is low and inflation is low... It has to be long-term borrowing and not short-term borrowing," he said.
The proposal faced criticism from other former RBI governors Raghuram Rajan and Y Venugopal Reddy and from allies of the ruling Bharatiya Janata Party. They argue it could create long-term economic risks by exposing the government's liabilities to currency fluctuations.
OTHER ARTICLES THAT MAY INTEREST YOU
[India] Improve Employment with Labour Reforms
India restores minimum wage increase
