2024-11-09 17:27:00
Rise of the rich
In Assessment Year (AY) 2013-14, corresponding to FY2012-13, India had around 40,000 individuals reporting a taxable income of more than `1 crore, according to a recent SBI Research report that sourced its raw data from the income-tax department. By AY2020-21 (FY2019-20), which remained largely unaffected by the pandemic, the number of crorepati taxpayers climbed to 120,000, with a modest increase to 130,000 the following year. A sharp rise in the number of super-rich Indians in the `1 crore-plus bracket was observed only in AY2022-23 and AY2023-24, reaching 190,000 and 220,000, respectively, according to the same data set.
“There is a demand for talent, with requisite experience and skills, in rapidly expanding industries such as AI-based tech sector, green energy, professional services, startups in emerging areas, travel and hospitality and real estate,” says Vikas Vasal, national managing partner of tax at Grant Thornton Bharat. He adds that many senior executives have also greatly benefited from a surging stock market, with the BSE Sensex leaping from 29,000 at the end of FY2019-20 to 73,000 by March-end 2024.
“After Covid, the great resignation wave hit corporates, which forced them to increase remuneration by 20-30% mid-year, and it also contributed to several salaried income taxpayers going above the crore mark,” says Ranen Banerjee, partner and leader of economic advisory at PwC India. He says high corporate profitability, along with large bonus payouts in recent years, has swelled the number of individuals in the crore-plus income pool.According to the ET Intelligence database, which looked at publicly available data of listed companies, the number of executives earning salaries of over Rs1 crore rose from 1,609 in 2019-20 to 1,902 in 2022-23 — a modest 18% increase over three years. This uptick can account for only a tiny part of the salaried individuals in the Rs1 crore-plus tax bracket. Tax experts, instead, point to the unusually large investment gains from a surging capital market as a key factor, with many salaried individuals in the Rs50 lakh-1 crore range crossing into the Rs1 crore-plus income tier. Sudhir Kapadia, senior advisor at EY, says the new wave of crorepati taxpayers spans legacy investors, fresh entrants in the futures and options space, successful startup founders and executives in select companies and sectors. While salaries of executives have risen due to intense competition for top talent, Kapadia points out that this alone doesn’t explain the substantial surge in crorepati taxpayers over just three years. “During the Covid period, as profits soared for major companies, dividends to shareholders also increased. With dividend income becoming taxable in the hands of individuals starting from 2020-21, many found themselves crossing into the Rs1 crore tax bracket,” he explains.
Mark the dividends
Former tax officials Prasad and Chandra agree, emphasising that the new rule of taxing dividends at the individual rather than the corporate level has driven numerous CEOs and senior executives across sectors into the Rs1 crore plus tax bracket.
While presenting the Union budget in February 2020, just ahead of the Covid pandemic, Finance Minister Nirmala Sitharaman explained the rationale behind the policy tweak, to be applicable from FY2020-21. “In order to increase the attractiveness of the Indian equity market and to provide relief to a large class of investors, I propose to remove the DDT (dividend distribution tax) and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT,” she said in her budget speech. “The dividend shall be taxed only in the hands of the recipients at their applicable rate.” DDT is a tax that a company. pays when it declares dividends to its shareholders. Introduced in 1997 and abolished with effect from 2020-21, the tax was set at a rate of 15%. Dividends, which represent a part of a company’s profits, are distributed to shareholders as a return on their investment.
This shift in law, which made individuals directly liable for taxes on dividend income, inevitably pushed a significant number of taxpayers into the `1 crore-plus bracket. Between FY2020-21 and FY2021-22, the count of crorepati taxpayers surged from 130,000 to 190,000—a 46% increase in just one year.
Will this trend continue?
Economist and former chief statistician Pronab Sen views the surge in crorepati taxpayers as part of a broader trend of income inequality. “During the Covid period, the MSME (micro, small and medium enterprises) sector was severely impacted, losing substantial market share. Larger and stronger companies swiftly filled the void. The top executives of these companies emerged as significant beneficiaries of the shift,” he says, noting that the buoyant stock market has further amplified this inequality.
However, in its October report, SBI Research suggested a different perspective, claiming that income-tax data reflects an overall decline in income inequality, “with upward transition of lower income people along with their income”. The report highlighted that 43% of individual tax filers earning below `4 lakh in AY15 (FY14) moved out of the lowest income group, demonstrating “a clear rightward shift in the income distribution curve,” as more individuals in lower income brackets increased their earnings.
While experts generally agree on the factors that triggered the sharp rise in Rs 1 crore plus taxpayers, their views on future trajectory vary. As wages in the services sector have steadily aligned with global benchmarks, “the pool of Rs 1 crore-plus income taxpayers will continue to grow,” says Banerjee of PwC India. Vasal echoes this optimism, suggesting that strong economic activity and sustained GDP growth will fuel this trend. India’s GDP surged by 8.2% in 2023-24, up from 7% in the previous year. “A parallel could be drawn from some similar large economies, which have seen an increase in high-income earners, with rise in economic activity and sustained GDP growth,” Vasal adds.
Not everyone shares this optimistic outlook. “The trend is bound to plateau,” says former CBDT chief Prasad, pointing to limited room for continued growth at the current pace. His successor Chandra says the recent wave of businesspeople relocating to the United Arab Emirates is one reason why he believes the “uptick may soon moderate”. The exact figures of ultra-wealthy Indians migrating to the UAE and other nations is not readily available. The broader trend is, however, clear: a significant number of Indians seized the crisis as an opportunity, coming out wealthier than ever.
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CIT full form in income tax
**Interview with R. Prasad, Former Chairman of the Central Board of Direct Taxes (CBDT)**
**Interviewer:** Thank you for joining us today, Mr. Prasad. The recent report indicating that the number of crorepati taxpayers in India has increased fivefold over the past decade has raised many eyebrows. What do you attribute this significant rise to?
**R. Prasad:** Thank you for having me. This phenomenal increase in crorepati taxpayers primarily stems from a combination of several factors. First and foremost, we’ve seen a booming stock market, which has led to substantial gains for many investors. Many large companies thrived during the pandemic, and their profits contributed significantly to this surge.
**Interviewer:** Interesting! You mentioned the pandemic. Some reports claim that a considerable number of individuals entered this high-income bracket during that period. Can you elaborate on that?
**R. Prasad:** Absolutely. The pandemic indeed catalyzed much of this change. When Covid hit, while many businesses struggled, larger firms adapted quickly and even posted record profits. This scenario not only buoyed the stock market but also led to significant dividends distributed to shareholders. The shift from the dividend distribution tax to taxing dividends at the individual level brought many into the crorepati category.
**Interviewer:** That’s a crucial point. How about employment trends during the pandemic? Did the so-called “great resignation” play a role in this income surge?
**R. Prasad:** Certainly. The great resignation saw companies aggressively recruiting and retaining talent. This led to salary hikes of 20-30%, pushing many salaried individuals over the Rs 1 crore mark. Additionally, roles in sectors like technology, green energy, and startups flourished, further increasing the remuneration for skilled professionals.
**Interviewer:** With more crorepati taxpayers emerges the question of income inequality. How do you see this trend affecting income distribution in India?
**R. Prasad:** That’s a complex issue. While the rise in the number of wealthy taxpayers may suggest growing inequality, it’s also important to note that many individuals in lower income brackets have seen increased earnings as well. This duality reflects a broader transition in the income distribution curve.
**Interviewer:** do you foresee this trend continuing? What should the government consider moving forward?
**R. Prasad:** Predicting the future is tricky, but as long as growth sectors continue to thrive and economic opportunities expand, we may see ongoing increases in high-income earners. The government should focus on ensuring sustainable growth across all sectors to address income inequality. A balanced approach will be crucial for long-term economic health.
**Interviewer:** Thank you, Mr. Prasad, for your insights. It’s evident that the rise in crorepati taxpayers is a multifaceted issue closely tied to various economic dynamics.
**R. Prasad:** Thank you for having me. It’s been a pleasure to discuss this important topic.
