Retrograde (GS Paper 2, Polity & Governance, Economy)
Introduction
- It is an idea that harkens to perhaps the worst aspects of India’s socialist past.
- The chairman of Indian Overseas Congress, Sam Pitroda’s comments on the inheritance tax, have raised the spectre of wealth redistribution, almost four decades after the very same Congress party under Prime Minister Rajiv Gandhi had abolished it.
The history of wealth tax in India
- The use of inheritance tax as a tool for redistribution of wealth to address income inequality has been discussed widely.
- India did have an inheritance (or death) tax once.
- The tax, which was known as estate duty, was introduced in 1953, and was abolished in 1985 by the government of Rajiv Gandhi.
- India also had a wealth tax and a gift tax, which were abolished in 2015 and 1998 respectively.
Reason for abolition of wealth tax
- The then finance minister V P Singh had noted that the estate duty, or the inheritance tax as it was then called, had “not achieved the twin objectives with which it was introduced, namely, to reduce unequal distribution of wealth and assist the states in financing their development schemes.”
- The then finance minister had acknowledged in his budget speech that collections from the tax were “only about Rs 20 crore” and its cost of administration was “relatively high”.
The existence of wealth tax around the world
- A March 2024 note by the International Monetary Fund (IMF), said tax rates on wealth have generally declined around the world over the past decades, with a decline in average corporate income tax rates being an important component across country groups of all income levels.
- Citing data for the Organisation of Economic Co-operation and Development (OECD) countries, the IMF said 12 OECD members had wealth taxes in 1990, but only three (Switzerland, Spain, Norway) now levy a broad-based wealth tax.
Is the Congress party serious about the reintroduction of wealth tax?
- The chairman of Indian Overseas Congress, Sam Pitroda’s comments on the inheritance tax were refuted as his personal opinion by the Congress party.
- Lately, Congress leader Rahul Gandi himself has been promising promised a financial and institutional survey to find out who holds the country’s wealth.
- He added that, “after this historic step, we will take revolutionary measures.” Read with Pitroda, there is an allusion to wealth redistribution.
- The Congress party election manifesto, on the issue of tax, makes some encouraging noises – for instance, it speaks about ushering in an era of “transparency, equity, clarity and impartial tax administration”, ensuring “stable personal income tax rates”, “lessen(ing) the burden of tax”, and eliminating “exploitative tax schemes”.
Will taxing the rich help in wealth redistribution?
- Researchers have flagged low tax rates often paid by wealthy individuals.
- According to the EU Tax Observatory, an independent research laboratory at the Paris School of Economics, global billionaires have effective tax rates equivalent to 0-0.5% of their wealth due to the frequent use of shell companies to avoid income taxation.
- A global minimum tax on billionaires, equal to 2% of their wealth, could potentially raise close to $250 billion from fewer than 3,000 individuals annually, it said in its Global Tax Evasion Report 2024.
- Wealthy taxpayers often reduce the incidence of average tax rates by exploiting loopholes and preferential treatments of certain capital income, the IMF said in its note.
- Citing data from various studies, the IMF said the wealthiest 25 individuals in the US faced an effective average tax rate of only 3.25% while a rate of 9.4% was reported for the top 400 families.
The Congress party is not giving a clear message to its voters
- That concentration of capital is a problem, that marginalised sections must get a leg-up, that efforts must be made to address inequalities of opportunity, expand the pie, is beyond debate.
- The Congress has promised a socio-economic caste census as a tool of affirmative action that will address inequalities rooted in historical injustices.
- Yet, the cavalier manner in which Gandhi has conflated these two issues, in the middle of an election campaign when there is little room for nuance, raises fears of a direct assault on wealth.
- And that, too, when the story of India’s wealth creation has just begun.
- There are indications that more and more Indians from all walks of life are beginning to participate in wealth creation, there are now more than 150 million demat accounts in the country as per recent data.
Conclusion
- By portraying the caste census as a magic wand that will deliver justice to one and all, by loosely talking of “surveys” and “revolutionary” steps, by floating the inheritance tax trial balloon, the Congress does a disservice to its own economic journey three decades after the landmark 1992 reforms that brought the curtains on the Licence Permit Raj.
