The Hindu Business Line : A wealth of irrelevance

IN INDIA, wealth tax, along with capital gains, gift and personal expenditure taxes, was imposed on the recommendations of Prof Nicholas Kaldor under a plan of integrated taxation. In the statement of objects and reasons appended to the Wealth-tax Bill, the levy of this tax, which individuals, HUFs and companies were required to pay, was justified "as an important constituent of an integrated tax structure to form a composite system made up of complementary elements. Apart from the fact that a composite tax system of this type helps satisfy the criterion of the ability to pay, it is consistent with the avowed goal of the attainment of a socialistic pattern of society." [1957 32 ITR (Supp.) 47]

India's commitment to a socialistic pattern was reaffirmed in 1976 when the words `socialist secular' were added before the words `democratic republic' in the Preamble to the Constitution by the 42nd Amendment Act, 1976.

However, ignoring the commitment to socialism enshrined in the Constitution, the Wealth Tax Act has not been implemented seriously. Rather, it was diluted almost immediately after it was made an Act.

The first blow to the Act came via the Finance Act, 1960 when, vide Section 13, wealth tax on companies was abolished from the assessment year (AY) 1960-61. It was revived in a limited way in closely-held companies for the AYs 1984-85 to 1992-93. With the insertion of Section 3(2) by the Finance Act, 1992 in the Wealth Tax Act, the tax on companies was again revived from the assessment year 1993-94, but this was done at a heavy cost in lieu of exemption from wealth-tax of the so-called productive assets, such as shares, securities, bonds, bank deposits, and so on.

The Finance Act, 1992 provided for wealth tax assets described as non-productive, such as residential and guest houses, urban land, jewellery, bullion, motor cars (except those held as stock-in-trade and used in the business of running thereon hire), planes, boat and yachts (other than those used by the assessee for commercial purposes). The basic exemption limit was also substantially raised to Rs 15 lakh and the tax rate was reduced from 2 per cent to 1 per cent.

The dilution, thus, in the wealth tax provisions has been quite substantial, going against the basic philosophy behind the Act. The total collection from this tax has fallen below Rs 100 crore a year, nearly half of which could be estimated as the cost of collection. Hence, from the revenue angle, it has lost relevance in the background of Rs 1,25,855 crore expected to be collected as income and corporation taxes in 2004-05.

The distinction drawn between productive and non-productive use of assets is illusory and is an attempt to bypass equity in taxation on the grounds of `economic growth'. There cannot be a trade off between these two important perspectives in a taxation policy, which has to operate independently. Wealth tax has often been advocated as an incentive for more productive use of wealth to earn enough to pay this tax. Further, capital and labour contribute to the process of production, and to exclude capital (wealth) from tax and subject labour (salary, wages, and so on) to income-tax is an unfair discrimination. However, in case a distinction between productive and non-productive assets is considered necessary, the former can be taxed at, say, 1 per cent and the latter at a higher 2 per cent.

The policy for wealth taxation needs to be formulated keeping in view the following:

as a complimentary legislation to income-tax;

as a revenue-raising measure in its own right;

to achieve certain social objectives;

to achieve certain economic goals; and

to generate revenue

Administering wealth tax is not a problem, as it is complimentary to income-tax both structurally and administratively. An annual tax on net wealth takes on inheritance and gifts, and is a means of making all those with a stake in the community (as measured by their asset holdings) to support the cause of the public.

Such a tax is justified on its own rights too. The possession of wealth carries with it a degree of security, independence and social power that is not adequately measured by the flow of realised money income which it gives rise to.

It constitutes an independent tax base that can be appropriately tapped by an annual tax on net wealth.

Redistribution of wealth is an important social consideration behind the tax. Research by academics (Revell 1969; Atkinson 1972) in Britain suggested that the richest 1 per cent of the population owned about one-fourth of the marketable personal wealth, and the richest 10 per cent as much as 75 per cent.

In this background, the proposal for a wealth tax in Britain in 1974 was seen by Mr Hailey, the then Chancellor of Exchequer, as a "determined attack on the mal-distribution of wealth in Britain."

Thus, treatment of wealth tax is a good parameter of prevalent, social and political attitudes towards the various dimensions of equality.

In India, its relevance is more apparent, considering the fact that 27-28 per cent of the population lives below the poverty line.

Wealth taxes would not impede economic growth. The consensus of most economists appears to be that most wealth taxes — whether low rate taxes levied annually or high rate taxes levied at death — are unlikely to adversely affect work/leisure, savings/consumption, or the choice of what sorts of assets to acquire.

And revenue-wise, the record of this tax in India shows that it has yielded good revenue. If restructured, it would be a good revenue earner in the future as well.

The imposition of a structured wealth tax regime would lead to efficiency, equity and revenue generation and enable the Government to achieve the basic objectives enshrined in the Preamble to the Constitution of a socialist democratic republic and the policy enshrined in the Directive Principles of State Policy that the economic system should not work to the common detriment and it does not lead to concentration of economic power in fewer hands.

If the political philosophy does not permit the Government to do so, it would be better to scrap the Act rather than have an ineffective and non-revenue yielding enactment in the statute book.

(The author is a former chairman of CBDT.)