Individual taxpayers earning over Rs 2 crore are likely facing a big tax outgo in the days ahead. Not only have they been hit with a higher surcharge, as announced in Budget 2019, but they are also looking at interest penalty for the advance tax installment that was due by June 15. Although their increased liability, and in turn the penalty, accrues from the implementation of the super-rich tax with retrospective effect from April 1, the government is reportedly not mulling a waiver.
Finance Minister Nirmala Sitharaman had proposed to hike the surcharge for individuals with a taxable income of Rs 2-5 crore from 15 per cent to 25 per cent, taking the effective tax rate to 39 per cent. Similarly, the surcharge for incomes over Rs 5 crore shot up from 15 per cent to 37 per cent, or a marginal tax rate of over 42 per cent. Since these surcharges come into effect from the beginning of this fiscal, even those who paid the first installment of the advance tax - up to 15 per cent of the total tax liability - within the deadline will be penalised on account of underestimation.
"Individuals will be saddled with the liability for payment of interest under Section 234C for no default on their part," Dilip Lakhani, a senior chartered accountant, told The Economic Times. The government should carry out a suitable amendment to waive interest, levied at the rate of 3 per cent, he added. The super-rich also have to factor in capital gains, which adds to their tax burden. For an individual earning a total income of more than Rs 5 crore, the long-term capital gains tax rate will go up to 14.25 per cent from 12 per cent, while the short-term capital gains rate will rise to 21.4 per cent from 17.9 per cent.
However, according to the government, the impact of the penal interest will be marginal. "Interest will only run post June 15 and should not amount to anything significant," a government official told the daily. As per Section 208 of the Income-tax Act, all individual taxpayers with an estimated tax liability of over Rs 10,000 in a fiscal have to pay advance tax in four installments, due in June, September, December and March.
The proposed surcharge will also apply to trusts, Hindu Undivided Families, firms and associations of persons (AoPs). According to experts, foreign portfolio investors (FPIs) - foreign entities investing in Indian stocks, bonds, and other such instruments - can choose to either come as a non-corporate entity or as a corporate. Around 2,000 of them, or 40 per cent of the total pie, automatically come under the new tax rate as they have been investing as a non-corporate entity, which are classified as an individual for the purpose of taxation.
Sitharaman recently clarified that such FPIs won't be exempted from the proposed surcharge. According to experts, this means that FPIs investing as a trust or AoP may also be liable to pay interest on the additional taxes payable, unless they have already paid full tax because they wanted to repatriate the money on sale.
The Lok Sabha approved the Finance Bill last week and the Rajya Sabha is expected to take it up on Tuesday. Once it is passed by the Upper House too, the Bill will await presidential nod before it is notified.
(Edited by Sushmita Choudhury Agarwal)