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Taxing Trapping: Wealth tax collection costs half as much
April, 08th 2009

When Adam Smith inquired into the wealth of nations, what he had in mind is not quite what the taxman goes after when he collects wealth tax. India's total wealth tax receipts are expected to be just Rs 425 crore this fiscal, barely double what it costs the government to collect this amount, Rs 216.3 crore.

The wealth tax rate is 1%, so the wealth that is taxed amounts to just Rs 42,500 crore, less than one per cent of the value of India's total output. In other words, only a tiny fraction of the country's wealth is subjected to tax, and for well considered reasons. Before a variety of productive assets were removed from the ambit of wealth tax in 1992-93, hiding or obfuscating the ownership of wealth used to be an industry in itself, generating large amounts of black money.

The fact that the government spends half its receipts of wealth tax on collection has led to the question whether it is worth continuing with this tax.

In fact, expenditure on wealth tax is budgeted to grow at a faster rate than receipts from it. While wealth tax is to increase by a meagre Rs 25 crore in 2009-10 to Rs 425 crore, the expenditure on the same is budgeted to increase from Rs 174 crore to Rs 216 crore.

Wealth tax is levied on 'unproductive' assets at the rate of 1% on wealth in excess of Rs 15 lakh. These assets include residential houses, farm houses, urban land, jewellery, bullion, motor cars, planes, boats, and yachts, among others. Earlier, the tax was levied on all forms of wealth including shares, bank deposits, fixed deposits, bonds, and debentures.

The regime was changed from assessment year 1993-94 to encourage investment in productive assets. This, in the opinion of many economists, laid the foundation for effective functioning of the stock market as an important mechanism for allocating savings to investment. Market capitalisation would not have become the shortest route to honest riches, had wealth tax continued in its pre-Reform avatar.

For every one rupee spent, the government collects only Rs 1.97 by way of wealth tax. In contrast, in the case of income tax the ratio increases to Rs 60 for every one rupee spent.

In the case of tax on corporate incomes, the ratio is even higher at Rs 701. The government has budgeted to spend Rs 348 crore in 2009-10 to collect corporate tax while total collections are pegged at Rs 2,44,200 crore. Increase in efficiency and some expansion of tax base has brought down the total cost of collections of these taxes in percentage terms to 0.53% in 2007-08 from 1.83% in 1998-99, being one of the lowest in the world. The cost of collection is 1.53% in Britain, 2.35% in Germany and 1.15% in Australia.

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