Why do Bollywood stars pay more taxes than billionaire businessmen in India?

·Columnist
·4 min read

Ever wondered why actors like Amitabh Bachchan, Shah Rukh Khan, Akshay Kumar emerge as highest taxpayers in India and not Ambanis or Tatas or Birlas, for example, even though they have big business empires and are wealthier than the actors?

Their wealth has increased even during the pandemic, but they pay less taxes than Bollywood actors. Why is that?

The answer to this might lie in the investigation done by ProPublica on American billionaires using income tax data.

In June this year, ProPublica, a Pulitzer Prize-winning investigative newsroom, claimed that US billionaires pay very little income tax. ProPublica said that it has seen the tax returns of some of the world's richest people, including Jeff Bezos, Elon Musk and Warren Buffett.

According to the website, the richest 25 Americans pay less in tax — an average of 15.8% of adjusted gross income — than most mainstream US workers do.

In 2007, Jeff Bezos, then a multi-billionaire and now the world’s richest man, did not pay a penny in US federal income taxes. He achieved the feat again in 2011.

In 2018, Tesla founder Elon Musk, the second-richest person in the world, also paid no federal income taxes.

Michael Bloomberg managed to do the same in recent years. Billionaire investor Carl Icahn did it twice. George Soros has paid no federal income tax three years in a row.

The alleged leak comes at a time when there is a growing debate globally about the amount of tax paid by the wealthy and the widening income inequality.

The combined wealth of the world's 10 richest men rose by $540 billion (Rs 40 lakh crore) during the pandemic, according to Oxfam. Oxfam claims this amount would be enough to prevent the world from falling into poverty because of the virus, and to pay for vaccines for all.

Shares of companies they own have grown manifold, same with the properties they own, their pictures are constantly flashed on magazine covers as the richest persons in America or the world, but they pay miniscule income taxes.

Most of the wealth of rich people/billionaires is investments in stocks, real estate, bonds, gold, cryptocurrency, etc. There is no wealth tax either in the US or in India. Unrealised gain is not considered as income for the individual.

Only when these billionaires sell their investments and realise profits, is it treated as income and taxed as long-term or short-term capital gains, depending on the duration the asset was held for.

Many US billionaires who have built or inherited a fortune, borrow against their wealth (loan against shares / loan against property) at low interest rates and use that to fund their expensive lifestyle. Further, they are able to claim the interest expenses on such loans as deductions from their income.

Last year, Tesla reported that Musk had pledged some 92 million shares, worth about $57.7 billion as of May 29, 2021, as collateral for personal loans.

ProPublica, using data collected by Forbes magazine, said that the wealth of the 25 richest Americans collectively jumped by $401 billion from 2014 to 2018 — but they paid $13.6 billion in income tax over that period. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.

From 2014 to 2018, middle class households in the US saw their net worth expand by about $65,000 after taxes on average, mostly due to the rise in value of their homes.

But because the vast bulk of their earnings were salaries, their tax bills were almost as much, nearly $62,000, over that five-year period.

According to ProPublica, ‘... using perfectly legal tax strategies, many of the uber-rich are able to shrink their federal tax bills to nothing or close to it’ even as their wealth soared over the past few years.

In India, big corporate honchos of big business houses, as CEOs get salaries and perks from their companies which are taxed accordingly. However, they are able to avoid the bulk of their taxes as wealth tax was abolished in the Budget 2015.

The cost incurred for recovering wealth tax was more than the benefits derived from it was the argument given by the government.

The tax returns of billionaires in India are not available in the public domain in India nor has anyone carried out an investigative story like ProPublica.

In India one difference from the US is that interest on personal loans is not deductible from income. A maximum of Rs 30,000 can be claimed as deduction if the amount is spent on home renovation or improvement.

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