On A Wealth Tax For India

It is best to swiftly declare one’s biases in the matter by asserting strongly both the moral and the pragmatic imperative of arresting the growth of economic inequality, in the cause (a) of rectifying injustice, and (b) of employing redistribution as a means of alleviating undeserved want. As for what might be done, here is an assortment of prescriptions: enhanced progressiveness in income- and property-tax schedules; gift and inheritance taxes; a minimum tax for corporations; an annual tax on wealth; a ‘minimum inheritance’ to be made available to all citizens upon the attainment of adulthood; a Child Benefit for all children. Lunatic radical prescriptions? It is hard to associate such a notion with the considered opinion of economists such as the late A B Atkinson, who combined within himself some of the finest qualities of the (ideal!) professional economist, those of analytical brilliance, scholarship, knowledge, experience, pragmatism, and moral conviction.

I bring this up precisely in order to point to the hiatus that now exists, in many parts of the world, between principled assessments of how to deal with inequality on the one hand, and the preparedness, on the other, of influential elements of civil society and governments to perceive any merit in such assessments. It is therefore just as well to state at the outset that what this brief note on wealth taxation in India has to say is amenable to swift dismissal, in the terms of a great deal of the philosophical, political and policy orientation of the day, as unrealistic nonsense. And perhaps it is—in the sense that a wealth tax likely will not be implemented in India, but not in the sense that it can not be. To see why, on both counts, it is useful to first review some basic facts on economic inequality, taxation, and the state of the economy in India.

Background: Wealth Inequality In India   

A great deal of information is available on the distribution of household assets in India, at decadal intervals from at least 1961-62 to 2012-13, in reports put out by the Reserve Bank of India and various All-India Debt and Investment Surveys. Some of this data has been analysed by Jayaraj and Subramanian (2018), among others. The study just cited suggests that from 1991-92 to 2012-13, average per-household assets at constant (1991-92) prices increased by a factor of 2.9 times in rural India, and by a factor of 5.1 times in urban India. In 2012-13, the share in the total value of household assets of the bottom 5 per cent was 0.03 per cent and that of the top 1 per cent was 20.1 per cent in rural India, while the corresponding figures for urban India were 0 per cent and 30.6 per cent, respectively.

The coefficient of variation (a purely ‘relative’ measure of inequality) rose, for rural India, from 2.07 in 1991-92 to 2.81 in 2012-13, while these numbers for urban India were 2.89 and 9.04, respectively. Both relative and absolute inequality measures are governed by extreme value-orientations (which Kolm (1976a,b) certified as ‘rightist’ and ‘leftist’, respectively, in the presence of growth). A centrist measure of inequality such as Krtscha’s (1994) index, which is given by the product of the relative coefficient of variation and the absolute standard deviation measures, might be expected to betray more ‘moderate’ values than either of these relative and absolute measures on its own. As it happens, Krtscha’s inequality measure has increased 5.3 times between 1991-92 and 2012-13 in rural India, and by an astronomical 50.3 times, over the same period, in the urban areas.

These must still be regarded as under-estimates of both the absolute levels of inequality and their rates of growth. Wealth surveys in India, as elsewhere, would benefit greatly from deliberate over-sampling of the rich. Often enough, one has to resort to the ‘rich lists’ prepared by particular journalistic sources (Fortune Magazine, Forbes, etc.) in order to obtain a more realistic picture of the actual dimensions of wealth inequality in a country. We shall return to this a little later.

Some Elements Of Taxation In India  

Here is a very short list of elementary facts about taxation in India, which should be of relevance to an understanding of the State’s ideological orientation toward the possibilities of redistributive policy in the country. One: India is an under-taxed country, with a tax/GDP ratio averaging about 10.4 per cent over the ten years from 2010-11 to 2019-20[i]. This is low not only in comparison with advanced countries (for example, around 34 per cent for the OECD countries in 2018[ii]), but also in comparison with a number of developing countries (for example, Armenia: 20.9 per cent, Azerbaijan: 13 per cent, Bhutan: 16 per cent, Botswana: 17.5 per cent, Burkina Faso: 15 per cent, all in 2018[iii]). Two: indirect taxation, which is essentially un-progressive, accounts for as much as nearly one-half of all tax revenue. Three: in 2019, the corporate tax rate was cut; companies were allowed to elect to pay tax at a reduced rate (while foregoing most other tax exemptions and incentives); the reduction in the effective tax-rate (including surcharge and cess) is from a range of 26-35 per cent to 25 per cent[iv], and is one reason for the tax/GDP ratio declining from over 11 per cent in 2016-17 to less than 10 per cent in 2019-20. Four: and most importantly, the wealth tax in India was formally abolished in the Union Budget of 2016-17! Five: and significantly, three Indian Revenue Service officers were charge-sheeted by the Central Bureau of Direct Taxes in April 2020 for allegedly creating panic by leaking a report containing a recommendation, among others, to re-introduce a wealth tax on individuals with a net worth of more than Rs. 5 crore (Rs. 50 million)[v]. 

The State Of The Economy

The unfathomable policy of demonetisation undertaken in 2016, accompanied by the shoddy implementation of a Goods and Services Tax and the immense loss of lives, livelihoods, incomes and jobs wrought by a COVID-inspired draconian lockdown have all conspired to send the Indian economy into a spiralling downturn, with unemployment rates hitting record levels, per capita rural consumption expenditure actually declining, and poverty rates increasing over the period 2011-12 to 2016-17, and first-quarter GDP for 2020-21 contracting by a massive 24 per cent.

And there is the ever-threatening presence of COVID-19. A much-touted ‘COVID fiscal stimulus’ claiming to account for 10 per cent of GDP has found itself whittled down to one per cent after one corrects for a good deal of window-dressing (Ray and Subramanian, 2020). According to some epidemiologists and public health experts[vi], the COVID infection has probably peaked at the time of writing and will decline over the next six months to become endemic by March 2021. By that time, 70 per cent of the population may be expected to have been infected (and gained immunity); and if a vaccine is discovered by then, 30 per cent of the population would need to be vaccinated — after eliminating the already-infected 70 per cent through anti-body testing. From where will the finances for this be raised?

A Wealth Tax For India?

A very useful compilation on the super-rich of India is available in the annual Hurun India Rich List brought out in a report by the finance services conglomerate IIFL. The list specifies all entities with a wealth (net worth) of at least Rs.1,000 crore (Rs. 10 billion). The list for 2019[vii] runs to 953 entities, of which 82 are non-resident Indians (NRIs). Making some liberal assumptions about the wealth of the NRIs, the aggregate wealth of the remaining richest 871 resident Indians works out to Rs. 37,076.34 billion, which is 19.75 per cent of India’s 2018-19 GDP of Rs. 187,689.12 crore. A uniform tax of five per cent on the wealth of the 871 richest resident Indians should yield up one per cent of India’s GDP. A flat tax-rate of five per cent has been suggested only for illustrative purposes; one can, instead, have a differentiated, progressive tax structure, as has been recommended in the context of a proposed COVID wealth tax for the European Union member states by Landais, Saez and Zucman (2020). The case for a wealth tax in South Africa has also been persuasively advanced by Chatterjee, Gethin and Czajka (2020), specifically against the backdrop of the COVID crisis[viii]. Indeed, the pandemic signals the urgency of raising resources by means of a wealth tax without compromising the case for its implementation on a regular basis in ‘normal’ times. After all, as the Hurun Rich list for 2020 points out, membership to the club of those with a net worth of at least Rs. 10 billion has galloped three-fold from 2015 to 2020!

Concluding Thought

A wealth tax for India is rationalisable by considerations of both justice and need, and as a way of raising resources without resorting to debt and its monetisation. The proposal is offered not in the spirit of “desperate measures for desperate times”, nor even of “reasonable measures for desperate times”, but in one of “ordinary measures for ordinary times”. In this view, a wealth tax in India can and must be implemented. That in all probability it will not is a different matter. 

References:

Atkinson, A. B. (2014). Inequality: What Can Be Done? Harvard University Press. Cambridge: Massachusetts.

 Aulakh, Gulveen (2020): ‘CBDT issues charge sheets to 3 senior IRS officers over report on tax hike’, The Economic Times, April 28, 2020. https://economictimes.indiatimes.com/news/politics-and-nation/cbdt-issues-chargesheets-to-3-senior-irs-officers-over-report-on-tax-hike/articleshow/75414801.cms.

Chatterjee, A., A. Gethin and L. Czajka (2020): ‘Coronavirus: Why SA needs a Wealth Tax Now’, The Conversation, April 29, 2020. https://theconversation.com/coronavirus-why-south-africa-needs-a-wealth-tax-now-137283.

Jayaraj, D. and S. Subramanian (2018): ‘The Distribution of Household Assets in India: 1991-92 to 2012-13’, Indian Journal of Human Development, 12(2): 181-203.

John, J. and M. S. Seshadri (2020): ‘Imperatives after India’s September Virus Peak’, The Hindu, September 29, 2020, p.8.

Kolm, S. Ch. (1976a). ‘Unequal Inequalities I’, Journal of Economic Theory, 12(3): 416-454.

Kolm, S. Ch. (1976b). ‘Unequal Inequalities II’, Journal of Economic Theory, 13(1): 82-111.

Krtscha, M. (1994). ‘A New Compromise Measure of Inequality’, in W. Eichhorn (ed.): Models and Measurement of Welfare and Inequality. Heidelberg: Springer-Verlag.

Landais, C., E. Saez and G. Zucman (2020): ‘A progressive European wealth tax to fund the European COVID response’, VoxEU/CEPR, April 03, 2020. https://voxeu.org/article/progressive-european-wealth-tax-fund-european-covid-response.

Milanovic, B. (2016): Global Inequality: A New Approach for the Age of Globalization, Harvard University Press, Cambridge: Massachusetts.

Piketty, T. (2014):Capital in the Twenty-First Century, Harvard University Press: Cambridge, Massachusetts.

Ray, D. and S. Subramanian (2020):  ‘India’s lockdown: an interim report’, Indian Economic Review. https://doi.org/10.1007/s41775-020-00094-2.

Seth, D. (2020): ‘India's tax-GDP ratio plunges to 9.88% in FY20, lowest in 10 years’, Business Standard, June 24, 2020. https://www.business-standard.com/article/economy-policy/india-s-tax-to-gdp-ratio-plunges-to-a-decade-low-of-9-88-in-fy20-120060801629_1.html.

Stiglitz, J. (2015): The Great Divide, Penguin Books.

Subramanian, S. (2020): ‘Doing the maths: Why India should introduce a Covid wealth tax on the ultra-rich’, The Scroll.in, April 16, 2020. https://scroll.in/article/959314/doing-the-maths-why-india-should-introduce-a-covid-wealth-tax-on-the-ultra-rich.

Footnotes:

[i] Government of India: ‘Income Tax Department Time Series Data Financial Year 2000-01 to 2016-17’. https://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Time-Series-Data-2016-17.pdf. See also Dilasha Seth (2020).

[ii] OECD: Revenue Statistics 2019: Tax Revenue Trends in the OECD. https://www.oecd.org/tax/tax-policy/revenue-statistics-highlights-brochure.pdf. 

[iii] World Bank: Tax Revenue (% of GDP). https://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS.

[iv] EY Tax Insights: ‘India Reduces Tax Rates for Indian Companies’. https://taxinsights.ey.com/archive/archive-news/india-reduces-tax-rates-for-indian-companies.aspx.

[v] Gulveen Aulakh (2020).

[vi] Jacob John and M. S. Seshadri (2020).

[vii] IIFL Wealth: Hurun Report India, IIFL Wealth Hurun India Rich List 2019, 25 September 2019 Press Release. https://www.hurunindia.net/hurun-india-rich-list-2019.

[viii] On a ‘Covid wealth tax’ for India, see Subramanian (2020), on which the present articles draws substantially.

S. Subramanian
S. Subramanian is an Independent Researcher, formerly a Professor at the Madras Institute of Development Studies, and former National Fellow of the Indian Council of Social Science Research. He specialises in aspects of Social and Economic Measurement, Development Economics and Collective Choice Theory. He has authored papers in various journals such as Journal of Development Economics, Social Choice and Welfare, Theory and Decision, and Economics and Philosophy.