Should the wealth tax be reinstated in India

Context: At a recent panel discussion in New Delhi, French economist Thomas
Piketty suggested that a wealth and inheritance tax be imposed on the
super-rich in India, which, in turn, could fund health and education. India’s
Chief Economic Advisor, Anantha Nageswaran, opposed the idea, arguing that
higher taxes could encourage fund outflows. There are historical and current
challenges in implementing wealth and inheritance taxes in India, such as tax
evasion, high administrative costs, and the risk of capital flight. These
issues have been evident in past attempts to introduce such taxes, including
the abolition of estate duty in 1985 and wealth tax in 2015.

Key points

·       Overview: In recent
years, the idea of taxing wealth has resurfaced, driven by growing concerns
over wealth inequality.

·       Study
by Thomas Piketty: A study by economist Thomas Piketty and colleagues
highlights a sharp rise in inequality in India, especially after 2014-15. Their
research indicates that the top 1% of income earners controlled 22.6% of the
nation’s income and 40.1% of its wealth in 2022-23—figures surpassing those of
countries like South Africa, Brazil, and the United States.

·       Piketty’s
Recommendations for India: Piketty and his co-authors propose a 2%
annual tax on net wealth exceeding Rs 10 crore and a 33% inheritance tax on
estates above the same threshold.

·       Challenges: Implementation
Challenges - Despite the appeal of wealth taxes, their implementation is
fraught with difficulties.

Estate Duty
Ineffective in Achieving its Goal - In 1985, when Finance
Minister V P Singh abolished the estate duty (inheritance tax), he noted that
its administration was costly and its revenue yield was minimal, with only
about Rs 20 crore collected.

Wealth Tax
Ineffective in Achieving its Goal - Similarly, when the wealth
tax was abolished in 2015, Finance Minister Arun Jaitley highlighted the tax’s
low revenue yield of Rs 1,008 crore in 2013-14, which amounted to less than
0.1% of the government’s total tax revenue.

·       Tax
Evasion and Capital Flight: History of Tax Evasion - An ancient
Egyptian papyrus from the 7th century BCE tells the story of an individual
attempting to evade inheritance taxes by undervaluing his property. The
punishment for such evasion — whipping.

Capital Flight - In the modern,
globalized world, the mobility of capital adds another layer of complexity.
High taxes could lead to capital flight, where wealthy individuals leave the
country to settle in tax-friendly jurisdictions like Dubai.

·       Case
of India: India has also seen an increase in the number of millionaires relocating
abroad. In 2023, approximately 5,100 Indian millionaires moved overseas, citing
financial and tax-related reasons.

·       Argument
Against Wealth Tax: It may reduce motivation for individuals to earn
more and invest, thus slowing down the country’s growth. Additionally, it could
reverse the shift away from its socialist past by discouraging private wealth
generation and entrepreneurship.

·       Way
Forward: Better GST Compliance - Strengthening GST compliance is
essential, as many goods remain outside its scope.

Reform in Income
Tax System - Streamlining and simplifying the income tax system could enhance
efficiency, broaden the tax base, and reduce the compliance burden on
taxpayers.