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.

About wealth tax 

• Definition: A wealth tax is a tax on an individual’s or entity’s net wealth, typically targeting the super–rich.
• History of Wealth Taxation
• • Switzerland: Wealth taxation is not a new concept. It dates back to the 19th century, with Switzerland’s Basel City introducing such a tax in 1840.
  • Other Countries: Other countries followed suit, including the Netherlands in 1892 and Sweden in 1911.
  • India: India joined the list in 1957 when Finance Minister T T Krishnamachari implemented the wealth tax.
  • Abolishment: However, over time, the number of countries imposing this tax has dwindled. For instance, the number of OECD countries levying the tax fell from 12 in 1990 to four in 2017.

Enroll now for UPSC Online Classes

Wealth Tax in India

• The Wealth Tax Act was enacted in 1957, following the recommendations of the Kaldor Committee (1955), as part of efforts to rationalize the tax system. 
• It imposed a 1% tax on net wealth exceeding ₹30 lakh annually, applicable to individuals, Hindu Undivided Families (HUFs), and companies.
• Abolition: The wealth tax was abolished in 2015 due to several challenges, including:
  • Extensive litigation.
  • High compliance burdens for taxpayers.
  • Significant administrative costs.
• Replacement Measures: To offset the revenue loss, the government introduced alternative measures by increasing the surcharge on the super-rich.
  • Surcharge for Individuals: Increased from 2% to 12% for those with an annual income exceeding ₹1 crore.
  • Surcharge for Companies: Increased from 2% to 12% for companies earning over ₹10 crore annually.

Arguments For Wealth Tax

• Addressing Inequality: High levels of wealth concentration reduce opportunities and capabilities for many.
  • Taxing the top 0.04% of the population could help fund health and education to create a healthier and more educated workforce.
  • Aligns with development goals without borrowing or running deficits.
• Global Examples: Countries like the UK and Norway impose wealth taxes with minimal capital flight due to strong public infrastructure and services.
  • Encourages international collaboration for transparency in wealth tracking.
• Technological and Institutional Feasibility: India has advanced systems to track economic activity (e.g., tax databases, digital infrastructure).
  • With proper frameworks, wealth tax could be effectively implemented.
• Developmental Impact: Revenues could finance health, education, and other social sectors.
  • Helps create a fairer distribution of resources.

Arguments Against Wealth Tax

• Challenges in Wealth Measurement: Difficult to define and measure wealth comprehensively.
  • Taxing liquid assets could incentivize holding unproductive assets like real estate and gold.
• Capital Flight: Higher taxes could drive wealthy individuals and businesses out of the country, reducing long-term economic prospects.
  • Lack of robust public infrastructure in India compared to countries like Norway makes capital retention challenging.
• Inefficiency of Redistributive Taxes: Redistribution through taxation has not proven effective in improving well-being in countries.
  • Economic growth, rather than redistribution, addresses well-being indicators like infant mortality and female empowerment.
• Implementation Challenges: Tax evasion is common through wealth shifting or proxies.
  • Surveys and data collection methods often fail to capture wealth accurately, especially at the top end.
• Public Finance Principles: Revenues and expenditures should be decoupled.
  • Public goods should be funded through effective taxes like personal income tax, GST, and property tax.

Check Out UPSC NCERT Textbooks From PW Store

Alternatives to Wealth Tax

• Focus on Existing Taxes: Expand and simplify personal income tax, GST, and property tax with low rates and minimal distortions.
• Improve Social Sector Efficiency: Before increasing allocations, address management crises in sectors like education and health.
  • Use results-based funding to ensure effective use of resources.
• Structural Reforms: Encourage investments in productive sectors rather than redistributive measures.
  • Build robust infrastructure and public services to retain wealth and capital.

DOWNLOAD PDF