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Glaring discrepancy in tax on high income: Partners in firms, LLPs taxed less than individuals

The government now allows partners in firms or LLPs to enjoy the previous tax rates, rather than the enhanced surcharge, as opposed to individuals who earn directly.

twitter-logo BusinessToday.In   New Delhi     Last Updated: July 15, 2019  | 15:35 IST
Glaring discrepancy in tax on high income: Partners in firms, LLPs taxed less than individuals
Surcharge on tax of high-income individuals

Among the Budget announcements by finance minister Nirmala Sitharaman, the one that led to an outcry was a higher surcharge on individuals earning more than Rs 2 crore and Rs 5 crore per annum. Now, a deeper look at the fine print suggests there's a possible flaw that may be potentially discriminatory.

The government now allows partners in firms or LLPs to enjoy the previous tax rates, rather than the enhanced surcharge, as opposed to individuals who earn directly. Ajay Bahl, Managing Partner of law firm AZB & Partners, has made a recommendation to the Sitharaman pointing out the flaw.

In her Budget speech, Nirmala Sitharaman had proposed the following increase in surcharge for high-income earners:

  • For individuals earning more than Rs 2 crore to up to Rs 5 crore the surcharge would be 25 per cent
  • For individuals with income above Rs 5 crore the surcharge would be 37 per cent

This means that an individual having an income of more than Rs 2 crore or Rs 5 crore would be subjected to a marginal tax rate of 39 per cent and 42.74 per cent, respectively. But, according to Bahl, if the person gets the income as a share of profit in a firm he/she would be subjected to 34.94 per cent tax rate.

In a letter addressed to the minister, Bahl stated that "a large number of individuals who meet your test of being high-income earners but earn that income as a share of profit from a partnership or LLP (firm) will not share the burden that those earning the income in an individual capacity will be bearing".

He added that there "seems to be no rationale for this discrimination and exemption to one category of income earners".

He also cited an example and said that if one earned Rs 6 crore then the individual who got the income directly would pay Rs 2.53 crore while the one who got the income as share of profit would pay Rs 2.09 crore.

Before offering a solution to the discrepancy, Bahl added, "We are certain that this was not your intention."

The lawyer then suggested the way to restore the imbalance. He further added in his letter, "To restore this imbalance, what is needed is to provide that the amount of tax, surcharge and cess payable by an individual who receives income through a Firm, after taking into account the tax, surcharge and cess paid by the Firm on such income, shall be equal to the amount that would have been payable had the income been earned by him directly."

Bahl mentioned that his suggestion, "if accepted, will not only be fair and non-discriminatory but will augment revenue collection which was the intent behind this levy".

Also read: Budget 2019: No tax relief for middle class, super rich to be taxed even more!

Also read: 'Highest' tax rate in India still lower than US, China: Finance Ministry

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