Wealth tax is a tax based on the market value of assets currently owned by a taxpayer, as opposed to taxes on asset sales, income, or real estate.
A wealth tax, also called capital tax or equity tax, is imposed on the wealth possessed by individuals.
The tax usually applies to a person’s net worth, which is assets minus liabilities. These assets include (but are not limited to) cash, bank deposits, shares, fixed assets, personal cars, real property, pension plans, money funds, owner-occupied housing, and trusts.
After Indian independence in 1947, the Indian Income Tax Act 1922 was the principal legislation governing the levy of direct taxes. With the Nehru-led Government in power, the trend in the economy in the initial years after independence was towards greater socialism.
There was a progressive taxation regime with higher taxes being levied on the rich. There were many problems in the Indian direct tax system resulting in heavy tax evasion.
The Government of India set up the Kaldor Committee in 1955 to rationalise the tax system and bring about affirmative reforms.
Pursuant to the suggestions made by the Kaldor Committee, the Government delineated a plan for a composite and integrated tax structure to ensure that no income or wealth escaped assessment.
Thus, the Wealth Tax Act (WTA) was introduced in 1957 as a permanent measure. It was abolished in 2015 due to several procedural difficulties such as extensive litigation, increased compliance burdens, heavy administration costs and generation of inadequate revenues.
Property Tax vs. Wealth Tax
Property tax is imposed by local governments on the owners of real estate such as land and buildings. The tax amount is typically based on the assessed value of the property. Local municipal bodies use property taxes to fund public services such as roads, schools, and sanitation.
Wealth tax, on the other hand, was a tax on the net wealth of individuals, including assets such as real estate, jewellery, cars, cash, and more. It was calculated on the total value of all taxable assets after subtracting liabilities. Wealth tax aimed to address economic inequality by taxing the accumulated wealth of individuals.
Tax Collections in India
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.
Mains Practice Question
Q) Discuss the feasibility of reintroducing a wealth tax in India, What impact wealth Tax will have on tax revenue, inequality, and economic growth while addressing concerns like capital flight and administrative challenges?