It’s time to consider a wealth tax that may lessen Indian inequality

Source– The post is based on the article “It’s time to consider a wealth tax that may lessen Indian inequality” published in the mint on 3rd January 2023.

Syllabus: GS3- Indian economy and mobilisation of resources

Relevance– Issues related to fiscal policy

News– The article explains the case of levying wealth tax in India .

Why is there a need to introduce wealth tax in India?

There has been massive accumulation of wealth in a few hands. It remains completely untaxed and unavailable for public allocation.

Wealth is largely dependent on inheritance and opportunities. It comes with the advantages associated with belonging to a privileged class and caste.

According to the World Inequality Database of 2022, India’s top 10% population owns 65% of the country ‘s wealth while, bottom 10% owns only 6%. An Oxfam report highlighted how India’s richest doubled their wealth during the pandemic.

One argument in support of wealth accumulation is that it could lead to investment. But this is not true in the case of India. Government lowered corporate tax significantly from 30% to 22% in 2019-20. But, it has not generated much private investment.

Investment has not created employment opportunities for youth. The unemployment rate in the 15-24 age group during May-July 2022 was 28.3%. In post-covid recovery phase, economic growth has largely been jobless.

What is wealth tax and its prevalence in India?

Wealth tax is a direct tax. It can take several forms such as property tax, inheritance or gift tax and capital gains tax. Capital gains tax exists in India but applies only to transactions. Hence, it has a very limited base.

India scrapped its estate duty in 1985 and has no inheritance tax. The receipt of gifts is subjected to income tax but it is subjected to various exemptions.

At present, India does not have any wealth tax that is tax levied on an entire property.

What is the way forward?

India needs a shift in its fiscal policy. It needs to adopt measures that create employment opportunities and drive demand for products made by small and medium producers.

Public investment is needed to boost the capabilities of small players across various sectors like agriculture and manufacturing. It is also required for essential public services to enhance the capabilities of youth.  One potential source of revenue to fund such investments is wealth tax

A number of Latin American countries have introduced annual wealth tax on wealth gains each year. This is the right time for the country to introduce a progressive wealth tax along with other fiscal steps that can reduce the growing inequalities.