SHOULD THE WEALTH TAX BE REINSTATED IN INDIA?

French economist Thomas Piketty proposed a wealth tax in India in 1957 to fund health and education. It was abolished in 2015 due to low revenue, compliance costs, double taxation concerns, and potential investment discouragement. Critics argue reintroducing the tax would require careful consideration.

Last Updated on 28th December, 2024
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Context:

French economist Thomas Piketty proposed a wealth tax on the super-rich in India to fund health and education.

What is wealth tax?

It is a tax imposed on a person's net wealth, which includes assets such as real estate, financial investments, and valuable possessions after subtracting liabilities. 

It was implemented in India in 1957 under the Wealth Tax Act, with two main objectives:

  • To redistribute wealth from the wealthy to the economically disadvantaged, thus promoting social equity.
  • To generate revenue to fund social welfare programs and public infrastructure.

Initially, the tax rate for individuals and Hindu Undivided Families (HUFs) was set at 0.5%, while for businesses it was 0.625%. Individuals, HUFs, and corporate entities with net wealth that exceeded a specific limit were subject to the tax. 

Why was the wealth tax abolished in 2015?

Low Revenue Contribution: In 2014-15, it contributed only 0.7% of total direct tax revenue, rendering it ineffective for generating significant funds.

High Compliance Costs: The process of valuing assets for tax purposes was complex and burdensome, resulting in higher administrative costs.

Double Taxation Concerns: Many argued that it was a form of double taxation because assets were already subject to income tax, capital gains tax, and property tax.

Impact on Investment: There were concerns that a wealth tax would discourage savings and investment, reducing overall economic growth.

Arguments in favor of reintroducing wealth tax  

A wealth tax could help to redistribute wealth from the rich to the poor, which will reduce income disparities.

It could provide the government with a new source of revenue to fund welfare programs and infrastructure improvements.

It would follow the principles of social justice by requiring the wealthy to contribute a fair share of public spending.

What are the concerns raised by critics about reintroducing wealth tax?

Wealth taxes may discourage people from accumulating wealth because they consider it as a penalty for saving.

Wealthy individuals may move their assets to countries with more favourable tax policies, resulting in a loss of potential revenue.

Valuing assets and ensuring compliance with wealth tax laws may put additional strain on both taxpayers and tax authorities.

If wealth tax were to be reintroduced in India, what key factors should be considered?

The rate and limit for wealth tax should be carefully considered to balance revenue generation with the potential impact on savings and investment.

To ensure fairness and consistency, an asset valuation process should be clear and transparent.

Policymakers should consider exemptions and deductions to avoid double taxation and reduce compliance costs.

To determine the effectiveness of a wealth tax, a thorough analysis of its potential economic and social consequences is required.

To prevent capital flight, the government may need to work with other countries on tax policy and enforcement.

Must Read Articles: 

BILLIONAIRE WEALTH TAX

PROPOSAL FOR A GLOBAL WEALTH TAX ON BILLIONAIRES

Source: 

The Hindu

PRACTICE QUESTION

Q.Critically analyze the potential benefits and drawbacks of reintroducing the wealth tax in India.  (150 words)

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