Robin Hood, the legendary hero depicted in the English folklore is known 'to rob the rich to feed the poor', or as Robin would say, "Rob? That's a naughty word, we never rob! Just sort of... borrow a bit from those who can afford it."

Robin Hood effect is when the less well-off gain economically at the expense of the better-off. The Robin Hood effect can be caused by a large variety of government interventions or normal economic activity. Because of differences in spending and investment at different incomes, fiscal policy can have a Robin Hood effect as a side effect of pursuing macroeconomic stability.

In this article, we shall explore the direct tax amendments proposed in Budget 2023 that may have a Robin Hood effect on the taxpayers.

Robin Hood: The Government through its Budget 2023

A dynamic budget, Budget 2023 has focused on growing with the changing times. The endeavour of the Budget 2023 is to create opportunities for citizens in an inclusive manner, with emphasis on growth and job creation. The Government has taken cognizance of the pressures faced by the middle-class. With regard to direct tax perspectives, Budget 2023 strikes High Net-Worth Individuals (HNIs) with higher tax liabilities by capping some deductions and withdrawing certain exemptions. Such proposals of Budget 2023 showcases that the Government has assumed the role of Robin Hood to provide benefit the middle-class with contributions from the HNIs.

Prince John: The HNIs

Prince John, the main antagonist of the Robin Hood saga rampantly taxes his subjects to heighten his own wealth and prosperity. As per the Annual Inequality Report released by Oxfam International, richest 1% Indians own more than 40% of the country's wealth. Taxation of the uber richhas always been debatable across the world. In India, the middle-class individual taxpayers are always in demand of increasing tax rates for HNIs, which stands at an effective rate of 39% (for new tax regime) after the proposed amendment in Budget 2023.

The Bow and Arrows: Attack on the HNIs

Robin Hood was a highly skilled archer and swordsman. He is known for always being armed with his longbow and arrows. The Robin Hood in this article is also an excellent archer and has shot a quiver of arrows at HNIs.

Arrow 1: Gain on transfer of Market Linked Debentures

At present, in case the MLDs are held for more than 12 months, gains on redemption of such MLDs are taxed as Long-Term Capital Gains at a rate as low as 10.4%. The dual benefit of indexation of cost of acquisition and low tax rate on gains would ultimately result in such gains being tax-free or taxed at a minimal rate in the hands of the MLD holders. Due to such lucrative tax benefits, MLDs have been a popular investment product among HNIs and family offices. They are a popular investment with NBFCs as well.

The Government is of the opinion that the tax benefits available to such instruments are being grossly abused. Hence, Budget 2023 has proposed to amend the Income-tax Act, 1961 (the Act) to treat gains arising from transfer, redemption, or maturity of MLDs as Short-Term Capital Gains, irrespective of the period of holding. The proposed amendment has dual effect on the taxation of such gains. Firstly, going forward, all such gains would be taxed at the slab rates applicable to the taxpayer. Since most of the taxpayers investing in MLDs are HNIs, they would now be taxed at a rate as high as 39% as opposed to 10.92% earlier. Secondly, indexation of the cost of acquisition would also not be available to the taxpayer. This would substantially increase the amount of capital gain and reduce the overall return of the investor.

Though the intention of the Government is to regulate all such instruments and ensure there is no tax leakage, such unreasonable and stringent restrictions would result in the MLDs losing their competitive edge. Investors agitated by such amendment may seek early redemption and withdraw their investment before such amendment comes into effect, creating a havoc in the market.

Arrow 2: Sum received under Life Insurance Policies

The Government is of the view that several HNIs are misusing the exemption provided in the Act by investing in policies having large premium contributions and claiming exemption. In view of the above, Budget 2023 has proposed to withdraw exemption provided under Section 10(10D) of the Act on amount received under a life insurance policy (other than ULIP) having premium or aggregate of premium exceeding INR 5 lakhs in a year. The proposal is to ensure that such provisions are not misused by individuals.

While withdrawing the exemption provided in Section 10(10D), the Government has also proposed to tax any sum received under a life insurance policy, including bonus on such policy, where the premium or aggregate of premium exceeds INR 5 lakhs in a year.

Despite being life's most permanent reality, death continues to be a difficult conversation in India. The Government fails to acknowledge that life insurance isn't a luxury but a necessity. In these unprecedented times, the Government should encourage individuals to safeguard their families by investing in life insurance policies.

Arrow 3: Capping exemption on sale of residential property

Section 54 and 54F of the Act provides for exemption to individuals and HUFs on capital gains arising out of sale of a residential property or such other capital asset if the gains are reinvested in another residential property. The provisions prevent its misuse by imposing a time limit for investment in the new residential property while also defining the minimum period of holding for such property. Failure to adhere by the conditions would result in withdrawal of the deduction claimed earlier.

It is pertinent to understand that the objective of these provisions is to promote house building activity. However, the Government is of the view that certain taxpayers (read as HNIs) are using these provisions to claim huge exemption by purchasing expensive properties. Hence, vide Budget 2023 it is proposed to put a cap of INR 10 crores on the deductions that can be claimed under Section 54 and 54F.

The Government fails to acknowledge that the real estate rates have been constantly on the rise in the last few years. Data from the Reserve Bank of India's house price index (HPI) shows that housing prices appreciated by 4.5% in the three months ended September 2022 as compared to the corresponding period in the previous year. The proposed amendment of restricting the deduction to INR 10 crores is contradictory with the reduction in highest rate of tax from 42.74% to 39%. Not only would it impact the HNIs adversely but also pose challenges for the already struggling real-estate sector.

Arrow 4: Tax Collected at Source (TCS) on foreign remittance

Budget 2023 proposes to amend Section 206C to increase the rate of TCS on Overseas Tour Packages and foreign remittance in any other case (other than for medical and education purposes) from existing 5% to 20%. Even though remittances for the purpose of education and medical expenditure are excluded, Indian parents provide monetary support to their children studying abroad. Due to the increased TCS rate, cost of such remittances would also increase. The cost of acquisition of foreign assets for HNIs would increase which would require a higher cash flow to attain similar returns as before or, alternatively, would reduce profits from the earlier levels.

The intention of the Government in proposing such a provision is unclear since such remittances were already subjected to TCS @ 5% and hence accounted for. In any case, foreign remittance would deepen the pockets of the government and reduce HNI profits.

Friar Tuck: The middle-class

A soft and generous person, Friar Tuck has had a rather straightforward literary life. He is disturbed by how much money Prince John is taking from them. The middle classes of all countries have been the key drivers of the global economy in the last century. India's middle class contributes approximately 79% of the tax base in India. It also contributes to 70% of consumer spending. In this era, extending benefits to middle-class is the need of the hour and would be the most practical approach.

Finally, Friar Tuck would proudly say to Robin Hood, "Oh, for heaven's sake, son. You're no outlaw. Why, someday you'll be called a great hero."

The Loot: Benefit to the middle-class

Robin would rob the wealthy individuals that passed through Sherwood Forest. He took from those who had been robbing the poor and gave the lootback to their rightful owners. Robin Hood here as well has made a sincere effort to pass on various benefits to the middle-class.

The populist Budget 2023 has proposed that the new income tax regime with lower rate of tax shall be the default tax regime. The basic exemption limit has been increased to INR 3 lakhs while rebate of 100% shall be available for individuals earning taxable income up to INR 7 lakhs. Budget 2023 has proposed tax exemption on leave encashment of INR 25 lakhs on retirement of non-government salaried employees in line with the government salaried class. At present, this limit was INR 3 lakhs only. The threshold limits for the presumptive taxation scheme have been increased from INR 2 crores to INR 3 crores for eligible businesses and from INR 50 lakhs to INR 75 lakhs for professionals. This increased limit will apply only in the case the aggregate of the amounts or amounts received in cash during the year does not exceed 5% of the total gross turnover/receipts.

The Shield: Alternatives available with the HNIs

Shooting arrows at the HNIs, makes it but obvious that the Government has personated Robin Hood vide Budget 2023. This would compel the HNIs to take shelter against the backdrop of corporate veil, pass through entities, diversion of funds, etc.

Highest rate of personal tax in India (after proposed amendments) is 39%. If HNIs were to park their funds in an eligible company, they may end up paying taxes only at 25.17%. Likewise, share of profit of a partnership firm is exempt in the hands of the partners while it is taxed at 31.2% in the hands of the firm, thus saving at least 7.8% taxes. HNIs may switch their investments from MLDs to certain other equity instruments to continue to earn higher return of investment while gaining the benefit of indexation of cost of acquisition and lower rate of tax. Alternatively, the person may arrange his stay in such a manner that he is a non-resident in India and pays taxes in the jurisdiction with low or nil rate or tax.

Robin Hood's Merry Men: Other departments of the Government

Just like Robin, the Merry Men are a group of outlaws. They are Robin's allies and support him in his mission of benefitting the poor. Various other policies introduced by the Government in the Budget 2023 has adopted a Robin Hood Approach.

The Government has taken conscious and active measures to propose a balanced budget to ensure overall growth of the nation. It is pertinent to note that the middle-class would benefit not only by the proposed amendments in direct tax but several other proposals of the Government.

Indirect tax, a form of progressive tax ensures that every person pays taxes on the basis of consumption. The taxes paid are directly proportional to the income of the taxpayer. Additionally, the Government levies a high rate of tax on luxury goods and low or nil rate of tax on essential goods to ensure that the taxes paid are in accordance with the spending pattern of such taxpayer. The Government has proposed to make huge capital expenditure and build infrastructure facilities for providing education and skill development to its citizens.

Striking a balance between taxing the rich and providing reliefs to the middle class is of paramount importance. In this regard, Kalidas in Raghuvansh while praising King Dalip has rightly said that "It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand-fold".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.