Will the Budget again tax the salaried class & consumers and let off the affluent lightly?

With the Finance Minister due to present next year’s Union Budget, there is a renewed call for the return of the wealth tax abolished by the Government in 2015. While some experts feel there is a strong case for addressing wealth inequality through taxation and specifically wealth tax, others are not so sure. Some have vehemently opposed it even as a few want the wealth tax to be brought back temporarily. There is also a few that Inheritance Tax will serve the purpose better.

Research suggests that wealth inequality is far greater than income inequality, and that there is some evidence suggesting that wealth inequality has increased in recent decades. Experts opine that wealth accumulation operates in a self-reinforcing way and is only likely to increase in the absence of taxation.

Lucas Chancel, co-director of World Inequality Lab as lead author, with French economist Thomas Piketty and others have in their World Inequality Report 2022 published by World Inequality Lab noted that India is among countries that have experienced a spectacular increase in inequality. “Inequality is not inevitable, it is a political choice,” Chancel and Piketty observe.

The 2019 Nobel laureates for economic sciences Abhiit Banerjee and Esther Duflo in a foreword to this inequality report write that the wealth of the top 10% globally, which constitutes the middle class in rich countries and the merely rich in poor countries is actually growing slower than the world average, but the top 1% is growing much faster: between 1995 and 2021, the top 1% captured 38% of the global increment in wealth, while the bottom 50% captured a frightening 2%.

“The share of wealth owned by the global top 0.1% rose from 7% to 11% over that period and global billionaire wealth soared. With the boom in the stock market, the picture does not seem to be getting better,” they note.

India’s former Finance Secretary Subhash Chandra Garg believes that the government taxes wealth with a soft-touch. “India’s taxation policy addressing wealth and income is flawed,” he says pointing to heavy taxation of the salaried class and kid-glove treatment of high wealth and income.

In India, during the pandemic (since March 2020, through to November 30, 2021) the wealth of billionaires increased from Rs. 23.14 trillion to Rs. 53.16 trillion, not-for-profit organisation, Oxfam India's latest report reveals. The report notes that the wealth of the world’s 10 richest men has doubled since the pandemic began.

The report dwells that thus, 99% of humanity are worse off because of COVID-19 that has widened economic, gender, and racial inequalities—as well as the inequality that exists between countries— which are tearing our world apart.

The report also states that in India, the wealth of billionaire Gautam Adani has multiplied eight-fold during the pandemic. Adding to this data, the Hurun Global Rich List 2021 reveals that in 2020, the world added 607 new billionaires (three every two days) and India welcomed 55 new billionaires (one per week).

Vidushi Gupta, Senior Resident Fellow, Vidhi Centre for Legal Policy says that while she agrees that India faces the issue of a significant gap in wealth inequality and that in theory the contribution of rich towards nation building needs to change, she is certain that there is no need to have a fresh law to tax the rich per se, as the existing framework can deal with that by clamping down on evasion, avoidance and aggressive tax planning.

“There are no two ways about the wealth inequality in our country. I just think that if you look at how the tax laws in India are structured, we are already doing a decent amount on paper in order to combat that. In the sense of that there is a progressive income tax rate.

So, as your income goes higher you pay a higher amount of tax. There is a surcharge for example where we have a capital gains tax which many countries don’t have. Then you also have the gift tax where anything gifted in value of over Rs. 50,000 is taxed,” she points out, adding that the issue lies in the enforcement of these laws.

Gupta however believes that a typical wealth tax framework has a few issues from a design standpoint. “I am not particularly a big fan of a wealth tax because in an economy like India, that is so cash heavy, it becomes really difficult to design a wealth tax framework that is effectively going to capture all forms of assets.

For instance, if the government decides to tax equity income, then people are either going to sell off their shares and start keeping cash or gold which offer huge options in India but are hard to trace. The tax authorities will find it difficult to know how much of your gold to tax if it is lying at one’s home. And therefore, in theory, I think there is a lot of justification for the introduction of a wealth tax but then designing it is a challenge,” she explains.

While many economists like Abhijit Banerjee are of the opinion that a wealth tax must make a comeback, India, unlike many other countries that have justified such a call citing the pandemic to be a once in a lifetime world war like situation etc. has not responded. Many feel that corporate tax cuts have not yielded the desired results and corporate India is sitting on a pile of cash while refinancing the banking sector will give the infrastructure sector a boost.

“I am just a little sceptical, because I don't know how a tax like that would look in India. Certain Nordic countries for instance have introduced a wealth tax, and included art, gold, but excluded cash. But then cash reliance on the economy itself is not particularly heavy.

Now that worked out fine for them. But will it for India, is the question, because there will be a natural shift towards cash in India,” Gupta says explaining the primary issues with designing such a tax for the country besides the administrative costs citing which the former finance minister Arun Jaitley had announced its abolition in 2015.

Gupta is of the opinion that what is more important for India with budget 2022, is to sort of bolster the existing framework. “I think this mindset that pre-tax revenue is a right and that everybody has the right to minimise their tax liability, and viewing tax as a penalty, as opposed to viewing it as a duty towards your nation.

Like let's say a high net worth individual or a corporation that did exceedingly well at a time where the rest of the country suffered significantly is a better way to look at this because it is far more long-term as far as voluntary compliance is concerned,” she explains.

The other administrative fault that experts in various think-tanks believe is that there could be merit in the government conducting a comprehensive cost-benefit analysis by way of bringing in laws on dealing with accumulated wealth without having to be dependent on capital transfer taxes alone.

Meanwhile, a study conducted by the Centre for Social Impact and Philanthropy (CSIP), Ashoka University, and Centre for Budget and Governance Accountability (CBGA) says that the impact of incentives on donations has diminished as there are no taxes that have a relatively large impact on the wealthy. The study found charitable donations to be low and attributed this to the lack of wealth and inheritance tax despite India having 237 billionaires, adding 52 in 2021.