Need for Wealth Taxation in India

IN NEWS:

• As per the recently released report titled "Survival of the Richest" by Oxfam International, the richest 1% in India now own more than 40% of the country's total wealth, while the bottom half of the population together share just 3% of wealth.
• As wealth inequality grows, discussions are going on about whether India should consider introducing a wealth tax.

WHAT IS THE WEALTH TAX?

• Wealth tax is a direct tax with the aim to reduce the inequalities of wealth.
• It is charged on the net wealth of super-rich individuals.
• While income tax is payable on the income earned by individuals regularly, wealth tax is payable on the assets bought with the income after paying income tax.

WEALTH TAX IN INDIA:

• India presently does not have any wealth tax—i.e., a tax levied on one’s entire property in all forms.
• From the late 1950s to 2015, India imposed a wealth tax; the last applicable rate was 1% on net wealth in excess of Rs. 30 lakh.
• As announced in the 2015 budget, the government abolished the wealth tax. Instead, the government decided to increase the surcharge levied on the super rich class by 2% to 12%.

WHY INDIA NEEDS WEALTH TAXATION?

• Concentration of wealth and violation of DPSP:
  • The most compelling reason stems from evidence that there has been a massive accumulation of wealth in a few hands in India, as shown by the "Survival of the Richest" report by Oxfam International.
  • The concentration of wealth violates the Article 39 of Directive Principles of State Policy (DPSP) enshrined in the Indian Constitution.
  • Under Article 39, the State shall direct its policy towards securing that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment. 
• Ineffectiveness of Trickle-Down economics:
  • The trickle-down theory, which states that tax breaks and benefits for corporations and the wealthy will trickle down to everyone else, proved ineffective in the case of India.
  • These tax breaks and benefits to the rich resulted in the creation of a small section of super-rich people who have access to a large share of economic assets, and these resources remain almost completely untaxed and thus unavailable for public allocation.
• Accumulated wealth does not turn into investment:
  • Figures and facts show that accumulated wealth in private hands will not necessarily be invested in the domestic economy.
  • For instance, the government lowered the corporate tax rate significantly from 30% to 22% in 2019-20, which has continued despite the economic crises caused by the pandemic. However, this did not elicit much private investment.
• To increase social sector spending:
  • Taxing the country's wealthiest individuals will provide the government with much-needed funds for social sector spending (health, education, and nutrition). 
  • For example, as per the "Survival of the Richest" report, 1% wealth tax on Indian billionaires is enough to fund the National Health Mission, India’s largest healthcare scheme.
  • Also, as per the report, a one-time tax of 5% on the 10 richest billionaires in the country (?1.37 lakh crore) is more than 1.5 times the funds estimated by the Health and Family Welfare Ministry (?86,200 crore) and the Ministry of Ayush (?3,050 crore) for the year 2022-23.
• The poor are paying disproportionately higher taxes:
  • The poor are paying disproportionately higher taxes and spending more on essential items and services when compared to the rich. The time has come to tax the rich and ensure they pay their fair share.
  • For example, approximately 64% of the total ?14.83 lakh crore in Goods and Services Tax (GST) came from bottom 50% of the population in 2021-22, with only 3% of GST coming from the top 10%.
• The pandemic effect:
  • The COVID-19 pandemic widened the country's disparities. As many found themselves struggling to survive, the ultra-rich in the country grew richer.
  • For instance, as per the “Survival of the Richest" report, since the pandemic began till November 2022, billionaires in India have seen their wealth surge by 121%.

CHALLENGES AND CONCERNS ASSOCIATED WITH WEALTH TAXATION:

• Revenue generated is fairly low:
  • While announcing abolition of wealth tax, Finance Minister Arun Jaitley in his budget speech in 2015 noted that the total collection was only Rs 1,008 crore in 2013-14.
  • Similar to the Indian experience, revenue generated by wealth tax is fairly low for other countries also. In 2016, revenue collection in Spain, for example, was 0.2 percent of gross domestic product (GDP).
  • A 2018 report by Organisation for Economic Co-operation and Development (OECD) showed that among its members, the number of countries that levied wealth tax came down from 12 in 1990 to 4 in 2017.
• More distortive and less equitable:
  • Wealth taxes tend to be more distortive and less equitable. This is primarily because the tax will have to be paid, irrespective of the income from assets.
  • For example, if an individual owns shares worth Rs 1 crore, she will need to pay the tax on the holding even if there is no income from it during the year. In fact, shares might have to be sold just to pay the wealth tax.
• Excessive borrowing:
  • OCED notes that wealth taxation could encourage excessive borrowing.
  • Since wealth is taxed at the net level (assets minus loans), people would be encouraged to borrow to reduce their tax liability. Excessive borrowing may not always benefit the economy.
  • Also, it could encourage speculative and risky investments as wealth is taxed at a flat rate, irrespective of returns.
• Rising income inequality in India:
  • Rising income inequality in India is a major cause of wealth disparity, and it cannot be solved solely through wealth taxation. It requires a multifaceted approach.
  • To read more about Rising Income Inequality In India: https://ilearncana.com/details/Rising-income-inequality-in-India/830
• Ease of doing business:
  • While announcing abolition of wealth tax, Finance Minister in his budget speech in 2015, cited the lack of ease of doing business as one of the reasons for abolishing the wealth tax.
• Additional administrative burden:
  • At a time when the government is trying to make the taxation system in the country hassle-free and transparent, the wealth tax might create an additional burden for taxpayers as well as officials.
  • For example, earlier, when there was a wealth tax, taxpayers had to value their assets as per the Wealth Tax Rules to compute their net wealth. For certain assets, such as jewellery, taxpayers had to obtain a valuation report from a registered valuer.

CONCLUSION:

• In theory, India employs several mechanisms that are aimed at taxing the rich. These include a progressive income tax rate structure, tax on capital gains, tax on gifts, and a surcharge on income tax on the super-rich. However, data has consistently shown that the rich in India are not paying enough tax.
• This is primarily due to the use of tactical measures to engage in tax avoidance and evasion.
• So the government must take the necessary steps to discourage such practices.  Also, voluntary compliance should be encouraged by simplifying tax laws and implementing sound policies. The relationship between taxpayers and tax authorities must also be rebuilt on the principles of transparency, trust, and cooperation.
• Apart from these, proper government policies that support social sectors such as health, education, nutrition etc. can be implemented to reduce the wealth and income inequality in the country.

PRACTICE QUESTION:

Q. “Growing inequalities signal that now is the time to bring back wealth taxation in India”. Discuss.