TOWARDS A WORKABLE ‘WEALTH TAX’

THE CONTEXT: India’s taxation issues focus on the low tax-to-GDP ratio and the regressive nature of the Goods and Services Tax (GST). The piece highlights the need for a broader income tax base and a more progressive tax system to address rising inequality and insufficient social spending. It also explores the potential of a wealth tax as a solution to these problems, referencing global examples and the opinions of wealthy individuals on higher taxation.

ISSUES:

• Low Tax-to-GDP Ratio: India has a low tax-to-GDP ratio, not due to high tax rates but to a narrow tax base. A broader income tax net is needed, as a significant exemption threshold currently leads to a small proportion of the population being subject to income tax.
• Regressive Nature of GST: The Goods and Services Tax (GST) is criticized for being regressive, disproportionately affecting the lower half of the income distribution. The rate of GST should be lowered to reduce the indirect tax burden on the poorer sections of society.
• Rising Inequality: Despite a reduction in poverty, income and wealth inequality in India are at their highest, posing a threat to social stability. Policies that address poverty and the widening gap between the rich and the poor are needed.
• Need for Social Spending: Increasing government spending on primary education and healthcare is called for to combat inequality and improve social welfare. However, a decline in the allocation of government budgets to these essential services underscores the need for enhanced tax collection.
• Wealth Tax as a Solution: A wealth tax could address inequality by taxing the wealth of the wealthiest individuals. However, it points out the challenges in assessing and taxing wealth, especially in assets like real estate, and suggests focusing on financial assets as a more feasible approach.
• Global Perspective on Wealth Tax: Referring to international examples of wealth taxes, it is argued that India, despite being a developing country, can implement such a tax, given its significant number of wealthy individuals.
• Public Support from the Wealthy: Some wealthy individuals have expressed support for higher taxes on the rich, recognizing the social responsibility to contribute more to society and prevent exacerbating inequality.
• Potential Benefits of Wealth Tax: A small wealth tax on financial assets above a certain threshold is proposed to generate significant revenue for social spending without deterring wealth or employment creation.

THE WAY FORWARD:

• Implementing a Wealth Tax on Financial Assets: Given the complexity of assessing wealth, especially in real estate and gold, India could initially focus on taxing disclosed financial holdings above a certain threshold, such as Rs 100 crore. A modest rate, such as 0.1%, could be a starting point. This approach would target the ultra-wealthy without discouraging investment or causing capital flight. The success of this measure would rely on India’s digital infrastructure and financial data accuracy, which has improved significantly due to digitization.
• Enhancing Transparency and Compliance: India must enhance transparency and compliance mechanisms to address tax evasion and ensure the effectiveness of a wealth tax. This could involve leveraging technology to track financial transactions and assets more accurately and international cooperation to trace assets held abroad. Strengthening the legal framework to penalize tax evasion aggressively is also crucial.
• Addressing Inequality through Comprehensive Tax Reform: A wealth tax should be part of a broader effort to make the tax system more progressive and equitable. This includes revising income tax slabs and rates to ensure they align more with the economic realities of different income groups. Reducing the GST rate on essential goods and services could also help alleviate the regressive impact of indirect taxes on the poorer sections of society.
• Investing in Social Priorities: The additional revenue generated from a wealth tax should be earmarked for significant investments in primary education, healthcare, and other social priorities. This would help reduce inequality of opportunity and address some of the root causes of economic disparity in India.
• Engaging with the Wealthy: The government should dialogue with the wealthy to build consensus around the need for a wealth tax. Many wealthy individuals globally have supported higher taxes on the rich to address societal issues. By involving them in the conversation, India can work towards a wealth tax policy that is considered fair and necessary for the greater good.
• International Examples of Wealth Tax: Countries like Spain, Norway, Switzerland, and France have implemented various forms of wealth tax, demonstrating that it is feasible to tax wealth effectively. These countries have highly evolved financial systems that make tax evasion difficult, thus ensuring a fairer distribution of wealth. For instance, Norway’s wealth tax is applied to an individual’s total net worth, including real estate, bank deposits, and shares, with specific exemptions and thresholds to protect lower and middle-income groups. On the other hand, France recently shifted from a broader wealth tax to a tax specifically on real estate wealth, aiming to encourage economic investment.

THE CONCLUSION:

India should consider implementing a wealth tax on financial assets above a certain threshold to address its taxation and inequality issues. The piece suggests that such a tax, even at a low rate, could significantly contribute to social spending without deterring wealth or investment. It emphasizes the importance of addressing income and wealth inequality to maintain social stability and uphold the principles of democracy.

UPSC PAST YEAR QUESTION:

Q. Explain intra-generational and inter-generational equity issues from inclusive growth and sustainable development perspectives. 2020

MAINS PRACTICE QUESTION:

Q. Discuss the potential benefits and challenges of implementing a wealth tax in India as a measure to address rising inequality and under-taxation while considering global practices and the Indian economic context.

SOURCE:

https://www.deccanherald.com/opinion/towards-a-workable-wealth-tax-3000333