India tops Forbes list for increase in tax misery

India has earned a dubious distinction of being the country adding maximum teeth to its tax regime since last year, says a study by Forbes.

While India still maintains a relatively low rank of 23rd least friendly tax climate in this year's Tax Misery Index, topped by France with harshest taxes across the world, it is ranked at top in terms of increase in its tax misery score, a collective measure of maximum corporate, personal, social security and sales tax rates.

The index, an annual global ranking compiled by the Asian edition of US business magazine Forbes, ranks the countries in terms of their tax climate harshness.

India was ranked 35th least tax friendly jurisdiction in the 2008 list.

The index assesses whether a jurisdiction's tax policy attracts or repels capital and talent by calculating its Misery score. Jurisdictions at the top of the index with high scores impose the harshest taxes, while the most tax friendly are at the bottom.

France, China and Belgium have been named as having top three harshest tax climates.

Qatar, the United Arab Emirates and Hong Kong have trumped other economies to retain the friendliest tax climate, as per the 2009 Tax Misery & Reform Index.

From 2008 to 2009, India saw its tax misery score rise by 24 points as a result of hikes in social security charges for both employer and employee.

"This move is part of a trend in Asia toward increasing social security coverage to a level comparable to that in Europe," Forbes said.

In India's total score of 113.4 points in this year's index, corporate and personal income tax rates contribute 42 points and 34 points respectively, 12.4 points are for VAT/sales tax, 12 points come for each of employer and employee social security and one point is contributed by wealth tax.

The top-end corporate tax rate of 42 per cent in India is higher than any other jurisdiction in the world, except for two in the US, where New York City has 46.2 per cent and Illinois has 42.3 per cent corporate tax rates. With a corporate tax rate of 41 per cent, Japan is ranked third after the US and India.

In terms of adding to the tax climate harshness, Malta comes a distant second after India with an increase of 10 points in its tax misery score. In comparison, the Netherlands recorded the biggest decline in its tax misery score of 10.5 points.

The Netherlands is fifth in the overall tax misery score after France, China, Belgium and Sweden.

About two dozen countries recorded a decline in their tax misery score and these jurisdictions include Switzerland, Italy, the UK, Canada, South Korea, Malaysia, New Zealand, Singapore, Russia and Taiwan.

Besides India, other countries that added to harshness in their tax climate include China, France, Finland, Turkey, Mexico, Luxembourg, Ireland and Thailand. The jurisdictions whose tax misery score remained unchanged include Germany, the US, Israel, Vietnam, Pakistan, Hong Kong, the UAE and Qatar.

There are eight European nations among the 10 least tax-friendly countries on the list, published in the April 13 edition of Forbes Asia.

"This year, most Asian jurisdictions continue to have more tax-friendly environment compared with other parts of the world. The survey shows that outside of China and Japan, the rest of Asia continues to enjoy stable, low tax advantage," Forbes noted.

"This year's 'winner' is, again, France, with a leader who said: 'I was not elected to increase taxes. Despite president Nicolas Sarkozy's assertion, France added 1.1 points to its Misery score," the magazine said.

Forbes said that capital gains rates were not included in the Tax Misery Index, as they vary from one to another country by asset type, period of retention and the adjusted cost basis of the assets sold.