Is it possible to reduce the income disparity in India?

Income inequality is the gap between the richest and the poorest. It can be defined as an extreme concentration of income/wealth in the hands of a small portion of the population.

In 2018, Oxfam India has reported that India is one among high inequality countries. It states that the inequality in India has been increasing, unlike other countries where it is stagnant or decreasing. 

One of the major causes for this increase is said to be the policies skewed in favour of the privileged. India has 101 billionaires and is estimated to produce 70 new billionaires between 2018 and 2022.

These billionaires form 1% of the population, but holds 73% of the wealth. In contrast, 67 crore people comprising the poorest half could witness 1% rise in the wealth.

Progressive Taxation: A Solution to Income Disparity

Progressive taxation is considered as an effective way to fight this issue. The concept encourages imposing a lower tax rate on low-income earners as compared to those who earn a high income. As a part of the efforts to reduce this disparity, the Government of India has tried to adopt and implement this concept.

Effect of Taxation on FPIs

Finance Minister Nirmala Sitharaman has announced additional slabs of surcharge with respect to foreign portfolio investors (FPIs) in her maiden budget. This move has resulted in foreign investors backing off from investing in Indian companies. 

Until 2018, India received over $430 billion investment and FPI grew steadily. In the past 18 months, FPIs were allowed to invest up to 25% in Category III alternative investment funds, infrastructure investment trusts, and real estate investment trusts. 

Although taxes on long-term capital gains (LTCG) were exempted until 2018, the Budget imposed an LTCG tax of 14.25% along with a tax arbitrage of 5% on short-term capital gains effective from 1 April 2019. This has come out as a shock to foreign investors.

Also Read: FPIs Facing High Surcharge, Government to Work on Solutions

Corporate Companies’ Response

In the recent Budget, the government has made an attempt to extend the corporate tax rate of 25% to companies with annual sales of up to Rs.400 crore from that of Rs.250 crore. This move covers about 99.3% of the companies in India under the lower tax rate category.

In February 2017, the then Finance Minister Arun Jaitley had stated that such a reduction can come after the spread of personal income tax is increased, i.e. more people pay taxes.

He had also announced that he would implement the reduction in corporate tax rates in a phased manner over a period of four years starting from 2015-16. 

Though it was not implemented as stated in the previous years, the corporate companies expected it to be implemented during the Budget 2019. However, the companies were disappointed as the government failed to keep up the promise of reducing the corporate tax from 30% to 25%.

The significant reason for the government to ignore this demand is that a 1% reduction from the current 30% in corporate tax would cost a loss of about Rs.18,000-Rs.19,000 crore in tax revenues. 

On the Personal Income Tax Front

Further, the government has also made provisions such that medium- and low-income earners need not pay taxes; it leaves more spending money in their hands. This can be seen as a move where individuals can save money wherein the income disparity can be reduced.

Also, the tax rate imposed on high-net-worth individuals has increased. It will make up for an increased tax collection from the Personal Income Tax (PIT) perspective. 

Apart from these, there are many more ways to bridge the gap between low and high-income earners. Imposing varied tax rates is not the only measure that can help achieve the goal. Poverty is defined as an income within $1.90 per day.

People can be raised from below poverty level by better-delivering government schemes, subsidies, and developmental programmes to the public. Better access to health, sanitation, drinking water, housing, employment opportunities, and other amenities can take our country a long way in terms of income inequality.

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