Increased taxation on the rich could have major negative impact on India’s luxury market

The upcoming budget in India is causing concern since off-the-record briefings signal that the government is going to increase taxes for the nation’s wealthiest elite Critics say such a move will stifle growth in a country that has seen the economy flounder recently. Supporters say the rich should ‘pay their fair share’ as the government looks to increase its tax revenues from fresh sources as the gap grows between money coming in and spending.

The debate started after a pre-budget meeting when the country’s finance minister, Palaniappan Chidambaram, said there was a global debate on whether the rich were paying enough tax. He said that India should also consider higher taxes for the ‘very rich’. His comments were picked up by economists who said the rich should face higher taxes but the debate has alarmed various business lobby groups who believe such taxes would hit growth.

India, which is Asia’s third biggest economy, has hit a number of crucial problems which has seen growth fall. There is a fast-growing budget deficit – fuelled by higher government spending and inflation is creeping up. In a recent television interview, Mr Chidambaram tried to calm fears by saying he was repeating an argument that was being made to increase taxes and it wasn’t his firm view that they should be imposed. He said: “I believe there should be stability in the tax rates we have but we should consider the argument that says the very rich should be asked to pay more.” However, Mr Chidambaram would not define what he meant by ‘very rich’.

The current tax regime makes India a tax effective place for rich people to live with a top rate of 30% on earnings of more than £11,700. Critics also point out that India needs to vastly improve tax collecting before thinking about increasing tax rates, pointing out that the country has just 35 million taxpayers out of a population of 1.2 billion. Most file tax returns declaring earnings below the 30% threshold.

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