Wealth tax in India will boost economic growth — roadblock is political will

The reason wealth tax failed earlier is because it was deliberately made complicated by allowing concessions, loopholes, etc. Now, with digital records, it should be easier to implement

Wealth tax in India will boost economic growth. The roadblock is political will

Despite tax reforms, there are only 90 million (6.5 per cent of the population) taxpayers. But, only about 15 million are effective taxpayers.

Written by: Arun Kumar

4 min readDec 19, 2024 02:26 PM IST First published on: Dec 19, 2024 at 07:13 AM IST

The editorial, ‘Picketty’s rights, wrongs’ (IE, December 17) is correct in its assessment of inequality, demand and taxation in India. But, one could disagree with the conclusion that taxation of wealth would be disruptive while not generating revenue for public goods. It is argued that recent reforms have broadened the tax base, which should lead to additional revenue.

As per the Union Budget 2024-25, the Centre’s tax collection according to the estimated GDP would be 11.78 per cent with direct taxes contributing 7 per cent. Additional taxes are collected by the states and the local bodies, taking the total tax to GDP to around 17 per cent. This is low compared to most other countries, which means inadequate expenditure on social sectors like education and health leading to low productivity and low incomes for a majority, resulting in weak demand and slowdown of growth.

Low tax collection is a result of black income generation. According to Oxfam estimates, the top 1 per cent on the income ladder earn 22 per cent of the national income. Projecting that further, the top 5 per cent may be earning about 40 per cent of the income. This means income tax collection from this 5 per cent should be about 10 per cent of GDP at an average tax rate of 25 per cent. Much more tax could potentially be collected if black income generation by the top 3 per cent in the income ladder could be checked.

Despite tax reforms, there are only 90 million (6.5 per cent of the population) taxpayers. But, only about 15 million are effective taxpayers. About half of the 90 million file nil returns and the rest pay negligible tax. So, the tax base remains narrow and the distribution of income is highly skewed. Even if agriculture incomes are taxed, the numbers will not rise much. The real problem is the taxation of services — the dominant sector of the economy.

How can more revenue be raised for development? Not by indirect taxes, since they are inflationary and regressive.

That is where wealth tax comes in. Wealth and its value are largely visible and/or recorded, so it can be taxed. Billionaire wealth is largely financial, in the stock market and the rich in India also hold real estate which is registered, even if benami. The reason wealth tax failed earlier is because it was deliberately made complicated by allowing concessions, loopholes, etc. Now, with digital records, it should be easier to implement, if there is political will.

Most assets are overvalued due to speculation. A wealth tax would bring down the prices. Take Reliance Industries; its share price is Rs 1,250. At a P/E ratio of 25, the return is 4 per cent or Rs 50 on the share value. The wealth tax at 2 per cent would be Rs 25. So, the net income would be Rs 25 per share. On this, there would be a 40 per cent income tax so that the net income becomes Rs 15. This return of 1.2 per cent would be way below that on bank fixed deposits.

So, funds would move from shares to the banks and industries and share valuations would decline from their stratospheric levels. As investments move to other productive investments, growth will be boosted.

The real problem could be the flight of capital, the decline of the Rupee and the BOP. Stricter capital controls would be needed temporarily. Animal spirits may be dampened till the rate of growth picks up and profits rise due to increased demand. Currently, financial bubbles build up and continuous stimulation of stock markets is required.

In brief, wealth tax is feasible in India. It will boost tax collections to fund greater investments in social sectors, resulting in a more productive workforce, higher economic growth and reduced inequality. If structured right, the black economy will decline, yielding even more direct taxes. The roadblock is political will.

Kumar is retired professor of Economics, JNU and author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead