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Updated: Jul 06, 2019 00:03 IST

India’s top marginal income tax rate touched 42.7%, the highest since 1992 when taxes were lowered as part of the first wave of economic reforms, after finance minister Nirmala Sitharaman introduced a surcharge on income tax for people earning more than Rs 2 crore. The move is expected to result in incremental tax revenue of approximately Rs 12,000 crore.

In an interview with CNBC TV18, Sitharaman said she saw the increased taxes not as something that penalised those who were already compliant with the tax system, but as a duty of those who have benefited the most from the country’s economic growth.

With the surcharges and 4% cess (which is not new), the effective tax rate becomes 39% for someone earning between Rs 2 crore and Rs 5 crore and 42.7% for those earning above Rs 5 crore.

In absolute terms, this will mean an increase of Rs 7.5 lakh a year in taxes for someone earning Rs 2.5 crore.

The new surcharge for people in the first income slab is now 25% (from 15%), and the second one 37% (also up from 15%). In terms of the tax rate, the increase works out to around 3 percentage points for those earning between Rs 2 crore and Rs 5 crore and around 7 percentage points for those earning more.

That’s among the steepest increases in effective tax rates in many decades.

The surcharge is levied only on people who earn more than Rs 50 lakh a year.

The finance minister said that the change is in view of rising income levels and those in the highest income brackets need to contribute more to the nation’s development.

“There has been a sharp increase in the surcharge rate proposed by the Finance Bill no 2 of 2019. This measure shall have a limited impact as the number of taxpayers having income above Rs 1 crore is approximately 140,000 as per the recent CBDT (Central Board of Direct Taxes) data,” said Suresh Surana, founder, RSM Astute Consulting Group. The exact number of people who earn more than ~2 crore and pay taxes isn’t known, but it is likely to be significantly less than 140,000.

Some experts fear that the surcharge could affect savings and point out that it’s usually individuals who earn more than ~2 crore that save the most.

“Two categories who come under this income bracket are promoters and high end professionals. People who will get impacted most will be the professional such as CXOs. There will be impact on their savings,” said Prateek Pant, head of products and solutions, Sanctum Wealth Management.

India’s peak tax rate until now was 35.88% , for those earning an income of Rs 2 crore and more. “While this is an additional tax burden for corporate India’s leaders, it is still far better than an aggressive estate duty,” said Rishabh Shroff, partner and co-head, Private Client Practice, Cyril Amarchand Mangaldas. His reference is to an estate or inheritance tax that the government was rumoured to be considering.