NOTE4STUDENTS:

India’s top 1% own 40.1% of the nation’s wealth, fueling inequality debates.UPSC often asks about wealth inequality through essay topics, GS paper questions on taxation policies, or the impact of economic disparities. Sometimes, it links wealth concentration to governance, social justice, or economic reforms. Many struggle with these topics because they focus only on memorizing facts. But UPSC wants clear analysis—why a policy was introduced, why it failed, and what alternatives exist. A surface-level understanding isn’t enough. This article simplifies the complex debate on wealth tax. It explains why India removed it, how other countries handle it, and what could work better. The best part? It connects policy with real data, making arguments stronger.

PYQ ANCHORING & MICROTHEMES:

GS 3: Capitalism has guided the world economy to unprecedented prosperity. However, it often encourages shortsightedness and contributes to wide disparities between the rich and the poor. In this light, would it be correct to believe and adopt capitalism driving inclusive growth in India? Discuss. [2014]

MICROTHEMES: Inclusive Growth X Capi talism

Wealth inequality has become a pressing issue globally and in India, with the top 1% owning 40.1% of the nation’s wealth. This concentration of wealth, juxtaposed against widespread poverty and dependence on state welfare programs, has reignited the debate on imposing wealth taxes to address inequality and generate public revenue.

About Wealth Tax

Wealth Tax is levied on the net market value of various assets owned by an individual, such as cash, bank deposits, shares, fixed assets, personal cars, and real property. Globally, several countries like France, Portugal, and Spain impose wealth tax. The primary objective of the tax is to target unproductive and non-essential assets of individuals.

Wealth Tax in India

The Wealth Tax Act was introduced in 1957 based on the recommendations of the Kaldor Committee (1955) as a part of tax rationalization measures. It imposed a 1% tax on earnings exceeding ₹30 lakh per annum for individuals, Hindu Undivided Families (HUFs), and companies.

Abolition: Abolished in 2015 due to issues such as Extensive litigation, Increased compliance burden, and High administrative costs. Replaced by an increase in the surcharge on the super-rich.
Replacement measures: The surcharge for individuals with income exceeding ₹1 crore and companies with income over ₹10 crore was increased from 2% to 12%.

Reasons for Abolition of Wealth Tax

Reason	Description	Examples/Supporting Data
Loopholes in the Tax System	Wealth tax rules had exploitable loopholes, enabling taxpayers to avoid liabilities.	Frequent litigation due to loopholes; taxpayers manipulated asset values to avoid tax.
Simplification of Tax Procedures	Abolishing wealth tax reduced complexity and multiple tax laws.	Replacing wealth tax with a 2% income surcharge improved efficiency and transparency (Post-FY 2015 Budget).
High Administrative Costs	Cost of collecting wealth tax was higher than the revenue it generated.	In FY 2013-14, wealth tax collection was only ₹1,008 crore, despite an increase in super-rich individuals.
Revenue Optimization	Replacing wealth tax with a surcharge significantly increased government revenue.	An additional ₹9,000 crore was collected annually through income surcharge post-abolition (FY 2015-16).
Administrative Burden	Valuation requirements for assets like jewelry created complexities for taxpayers and regulators.	Taxpayers needed valuation certificates for assets, leading to compliance issues and disputes.
Wider Taxpayer Coverage	Income tax had broader coverage than wealth tax, ensuring better taxpayer inclusion.	In FY 2011-12, only 1.15 lakh wealth tax assessees existed, compared to millions filing income tax returns.
Improved Asset Reporting	Income tax surcharge continued asset reporting, aiding better monitoring and preventing tax evasion.	Post-abolition, taxpayers had to declare assets under income tax returns, reducing wealth leakage.
Low Awareness of Wealth Tax	Many individuals were unaware of wealth tax obligations, leading to frequent non-compliance notices.	Frequent tax notices to non-compliant taxpayers; poor awareness led to confusion and low participation in wealth taxation.

BENEFITS AND CHALLENGES OF INTRODUCING WEALTH TAX IN INDIA

Arguments in Favour of Wealth Tax	Arguments Against Wealth Tax
Addressing Inequality: Helps redistribute wealth in an economy where the top 1% control a disproportionate share of resources.	Administrative Challenges: Complex valuation of non-liquid assets (e.g., real estate, gold) leads to high costs of collection.
Revenue Generation for Welfare: Funds raised can support public healthcare, education, and social schemes like MGNREGA.	Low Revenue Generation: In 2013-14, India’s wealth tax contributed only ₹1,008 crore, less than 0.1% of total tax revenues.
Progressive Tax System: Targets the ultra-rich, ensuring the tax burden is equitable.	Tax Evasion: The wealthy often find ways to hide or underreport their wealth.
Moral and Social Responsibility: Promotes fairness by requiring the wealthiest to contribute more to societal development.	Capital Flight: High net worth individuals may relocate to tax-friendly countries, as seen in Norway, harming domestic investments.
	Impact on Wealth Creation: Discourages entrepreneurship and investment, critical for India’s growing economy.

Way Forward: Making Taxation Fair and Effective

Better Alternatives to Wealth Tax – Instead of reintroducing wealth tax, India can improve capital gains tax, property tax, and inheritance tax to ensure the rich pay their fair share.
Higher Taxes for the Ultra-Rich – Raising income tax rates for the wealthiest can make the tax system more progressive without adding new complexities.
Stronger Tax Compliance – Using technology and data analytics can help track high-value transactions and reduce tax evasion.
Expanding the Tax Base – Encouraging more individuals and businesses to enter the formal tax system will distribute the tax burden more fairly.
Transparent Use of Taxes – Clearly linking tax collection to improvements in healthcare, education, and infrastructure will build public trust.
Global Coordination – Working with other countries to prevent capital flight and tax evasion will ensure the wealthy can’t easily avoid taxes.
Encouraging Philanthropy – Offering incentives for voluntary contributions and charitable donations can motivate the rich to give back to society.

BACK2BASICS: Components of Economic Inequality in India

Component	Description	Example
Income Inequality	Wide disparity in income distribution between different groups and regions.	The top 10% of India’s population earns 57% of the national income, while the bottom 50% earns only 13% (2021).
Wealth Inequality	Disproportionate concentration of assets and wealth among the elite, with minimal ownership by lower-income groups.	According to Oxfam’s 2023 report, the richest 1% own more than 40% of India’s wealth.
Educational Disparity	Unequal access to quality education, which directly affects employment opportunities and income levels.	Rural girls, especially from marginalized communities, have significantly lower school enrollment rates.
Health Inequality	Uneven access to healthcare services, resulting in poorer health outcomes for economically disadvantaged groups.	Urban areas have 1.5 times more hospital beds per capita than rural areas, exacerbating rural health crises.
Regional Inequality	Stark differences in development levels, infrastructure, and living standards across states and regions.	Kerala has a high HDI of 0.782, while Bihar lags behind with an HDI of 0.574 (2022).
Employment Inequality	Differences in access to secure and well-paying jobs, often divided along caste, gender, and regional lines.	Women’s participation in the workforce was only 25% in 2022, and Dalits face higher unemployment rates.