Ex Chief Economic Advisor, Arvind Subramanian in an Interview to The Economic Times published 16 April 2020 suggested the re-Introduction of Wealth Tax and I quote :”The government should consider a Solidarity Fund with a one-time annual contribution coming from the wealthy and the employees in the organised sector… The wealthy could contribute via a wealth tax with thresholds set by property values say above Rs 5 crore,” he is quoted to have said.
The stated purpose is to set-up a Solidarity Fund with a Target Fund collection of 1 Lakh Crore so that the haves can support the have-nots, in a post CoViD 19 India.
Indian people and corporates have positively responded to PM Narendra Modi’s call and generously contributed to PM CARES fund set up for this purpose duly acknowledged by the PM on Twitter. What is the basis to set up another Fund with a different name? Till April 4, 2020, according to a The Print Report around Rs 6500 crore were collected in the PM CARES Fund.
This Contribution is in addition to Businesses, small or big, paying Salaries & Wages to employees without work on humanitarian grounds as directed by Government and also incurring huge costs and losses without any supporting Revenues / suspension of commerce during Lockdown.
A wealth-tax @1% on property values above Rs 30 lakhs (the then threshold limit) raised around Rs 2000 crore in Financial Year 2014-15 as evident from then FM Arun Jaitleys budget speech (Exact Quote in Note below). How much Revenues will a Wealth-Tax on property values above 5 crore garner?
Can we by any measure of reality expect to garner even a fraction of the princely sum of Rs 1 lakh crore being targeted from voluntary contributions to a Solidarity / PM CARES Fund and a Wealth Tax as proposed.
We also need to note that in the same interview he has said that he estimated 1.5% to 2.7% Indian GDP Growth by IMF / World Bank as “too optimistic”.
The then FM had also noted the purpose of abolition of Wealth Tax in his Budget speech as “simplification of Tax Procedures without compromising on tax revenues … and also enable the Department to focus more on ensuring tax compliance and widening the tax base.” Will a reintroduction of Wealth Tax not thwart what has already been achieved and reverse the process. Ironically, this year’s Economic Survey was themed on “Wealth Creation”.
What started as a 2% Surcharge on the super rich in the 2015-16 Budget has already been raised to 37% by incumbent FM Nirmala Sitharaman raising effective personal Income-tax rate to around 42% (inclusive of all Surcharges & Cess) amongst the highest in the World.
What former CEA Arvind Subramanian, himself a Non-resident, suggestion will achieve is aggravate the outflow of High Net Worth Individuals from India -Entrepreneurs, Highly Skilled Professionals whose presence in India can have a multiplier contribution to the Indian Economy – New Businesses / Startups, Jobs, Private consumption, Savings and Investment. Morgan Stanley & NW World in a report estimated that between 2014 to 2017, nearly 23,000 dollar-millionaires emigrated from India. In 2018, nearly 5,000 HNIs left the country, which is 2 percent of the total Indian HNIs, says the Global Wealth Migration Review 2019.
India certainly needs to garner Tax Revenues to fund Welfare of the poor. Tax Revenues have increased from Economic Growth and Development, the path to which is Tax Reforms including lower tax rates, competitive with other developing countries. Today, just like CoViD 19 Virus both Labour and Capital are mobile.
Howsoever, we may dislike this statement, India is low per-capita Income country with Incomes in the range of USD 2900 in 2020. We cannot fund a Welfare budget comparable to High Income country like USA (around USD 50000) or even a middle income country like China (around USD 18000).
What India certainly does not need is a return of the Socialist era – High Tax & Higher Compliances coupled with low tax collection & large scale Tax Evasion prevalent during the decade of 1970’s – when Socialism and Tax rates peaked in India.
There is an old adage : The wealthy are like sheep : You can fleece them many times but skin them only once.
Note :The the Finance Minister Late Shri Arun Jaitley abolished Wealth Tax replacing it with a 2% surcharge on Super-rich in his Budget Speech 2015-16 and I quote from the Budget speech Para 113 ::
“113. My next proposal is regarding minimum government and maximum governance with focus on ease of doing business and simplification of Tax Procedures without compromising on tax revenues. The total wealth tax collection in the country was `1,008 crore in 2013-14. Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax? The rich and wealthy must pay more tax than the less affluent ones. I have therefore decided to abolish the wealth tax and replace it with an additional surcharge of 2% on the super-rich with a taxable income of over `1 crore. This will lead to tax simplification and enable the Department to focus more on ensuring tax compliance and widening the tax base. As against a tax sacrifice of `1,008 crore, through these measures the Department would be collecting about `9,000 crore from the 2% additional surcharge. …”