(Updates throughout with quotes, data, background)
By Ross Colvin and Sumeet Chatterjee
NEW DELHI/MUMBAI, Jan 24 (Reuters) - India should consider
the argument for higher taxes on the "very rich", Finance
Minister P. Chidambaram said in comments likely to fuel
speculation about steps he may take in next month's budget to
boost tax flows and narrow a yawning fiscal gap.
In an off-the-record pre-budget meeting with Chidambaram and
Finance Ministry officials on Jan. 7, some economists pressed
for higher taxes on the rich to make sure they are paying their
fair share, alarming business lobby groups that warn such a move
would stifle growth.
The Indian finance minister's comments come against the
backdrop of a global debate, from the United States to France,
about whether the very wealthy pay enough taxes.
The growth rate of Asia's third-largest economy is widely
expected to slip to a decade-low in fiscal 2012/13 as the
government grapples with ballooning budget and current account
deficits and high inflation. Chidambaram wants to plug holes in
the nation's finances by cutting expenditure and increasing
revenues through improved tax collection.
"I think we should have stability in tax rates but we should
consider the argument that very rich should be asked to pay a
little more on some occasions, but that is not the view I am
expressing. That is simply the argument I have heard and I am
repeating," Chidambaram said in a TV interview aired on
Chidambaram offered no definition of the "very rich", but
his comments are likely to please many in his centre-left
Congress party who feel recent reforms to further liberalise the
economy favour corporate India at the expense of the common man.
The Congress party is facing a tough fight to hold on to
power in a series of state elections this year and general
elections due by May 2014.
"It is good electoral politics but economically doesn't make
sense," said Venugopal Dhoot, who controls India's diversified
Videocon Group and ranks 38th in Forbes' India rich list with a
net worth of $1.5 billion.
It was not immediately clear if Chidambaram was referring to
higher taxes on income, assets or capital gains in a regime that
currently makes India a good place for the rich to live.
At present the top income tax rate is 30 percent, which
applies to earnings above 1.0 million rupees ($18,500) a year.
There are just 35 million taxpayers in a country of 1.2 billion
people, and of them about 1.5 million declare annual earnings of
more than 1.0 million rupees, according to the Finance Ministry.
There is no inheritance tax, an issue Chidambaram raised as
a concern after being appointed finance minister last August. In
2009, his predecessor withdrew a 10 percent surcharge on the
30-percent rate paid on earnings above 1.0 million rupees.
A government official with direct knowledge of the debate in
the Finance Ministry said the focus is on plugging loopholes in
the collection of income tax paid by individuals and companies.
"There are options of revisiting the inheritance tax and
surcharge on income tax paid by the individuals," the official
said, declining to say if these were firm proposals on the table
for the budget to be unveiled around the end of February.
MILLIONAIRES AND BILLIONAIRES
"Even if they bring (back) the surcharge that will only add
about 15-20 billion rupees, which is a drop in the ocean and
will be lost in the decline of tax revenues that will arise due
to lower compliance if tax rates are raised," said Surjit
Bhalla, chairman of advisory firm Oxus Investments.
India's richest people tend to own businesses and other
assets and thus have comparatively little exposure to salaries
tax. Billionaire Mukesh Ambani, for example, was paid salary and
perks of 150 million rupees ($2.8 million) in the last fiscal
year by Reliance Industries, which he controls. According to
Forbes, Ambani is worth $21 billion.
Similarly, Azim Premji, founder of India's No. 3 software
exporter, Wipro Ltd, and India's third-richest person
with a net worth of $1.2 billion, took home a salary and
allowances of $84,696 in the last financial year, less than half
of what the company's chief financial officer was paid.
Premji said at a gathering of business leaders in Davos,
Switzerland, on Wednesday that in principle he was not against
higher taxes for the wealthy.
A similar debate over taxing the well-heeled has played out
recently in developed economies.
U.S. President Barack Obama made it a central theme in his
re-election campaign and won a political victory over his
Republican opponents in getting Congressional approval for tax
hikes on households earning more than $450,000 a year.
And French Prime Minister Francois Hollande's plan to hike
taxes on income over 1 million euros made headlines after French
actor Gerard Depardieu said he would move abroad.
Responding to Chidambaram's comments, wealth managers told
Reuters India needed to focus more on compliance and increasing
the tax net instead of raising rates for rich people.
Raising taxes on the rich would not make a significant
impact to the tax-to-GDP ratio as a large portion of the wealth
remains outside the mainstream system and is invested in real
estate and gold or finds its way to tax havens, they said.
India had 125,500 dollar millionaires in 2011, according to
a Capgemini and RBC Wealth Management's world wealth
report released last June.
(Additional reporting by Manoj Kumar, Arup Roychoudhury and
Frank Jack Daniel in NEW DELHI and by Suvashree DeyChoudhury,
Nandita Bose and Tony Munroe in MUMBAI; Editing by John Chalmers
and Ron Popeski)