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It is a penalty for those who invest
August, 18th 2009

The Direct Tax Code Bill, 2009 will easily be one of the biggest tax reform measures in modern India. The code has several well-thought through changes and in most cases, one cannot help feeling a sense of pride that many of the provisions reflect the changed times and the changed way in which business is conducted.

Yet, some hangovers from the past remain, and the provisions related to wealth tax stand out as one. The introduction to the code urges the reader to not have pre-conceived notions and to not compare the provisions with the current laws. While every attempt must be made to read the Code in this backdrop, the wealth tax provisions are unfortunately, nothing but a mirror of the past.

Let us first trace the history of the wealth tax provisions. It was based on the counsel of Mr Nicholas Kaldor, a Cambridge economist, that the levy was first introduced in 1957. It was a part of a series of recommendations, including the one to tax capital gains, and the reference was to tax wealth in excess of Rs 15 lakhs at the rate of 1.5%. It could easily be argued that the circumstances then demanded the levy of such a tax, since it was like a self-checking mechanism and was meant to compensate for the taxes that may not have been paid by several people who had amassed large fortunes.

I would however, argue that the relevance of this tax was soon lost and there is no better measure of this than the fact that the threshold limit for the levy remains at Rs 15 lakh and collections are almost lost in rounding off.

The new code unfortunately, seems to persist with this now redundant concept. Although there is a marked change in the broad contours of the tax in so much that it now applies only to individuals and HUFs, and the limit has increased manifold to Rs 50 crore, the very concept and levy should be questioned and challenged.

There are several arguments stated in the discussion paper to the new code. Most of them hinge on the concept of progressive taxation, and the other talks of the objective to capture tax avoided or evaded. The current scheme of taxation covers all forms of income and the code goes many steps further in plugging revenue leakages.

It is therefore, difficult to fathom why there should remain a residuary mechanism to deal with perceived tax avoidance and at that, by way of a wealth tax levy. Notwithstanding the principles of progressive taxation, I strongly believe that there is no place for such a levy in a free market economy. Wealth and asset creation must be strongly encouraged and since it is created with tax paid incomes, there is no case for another levy, howsoever small it may be. It is almost a penalty for those who invest, as compared to those who dont.

It is not often that we get the opportunity to be on the centre stage and the focus should be to herald and announce to the world a tax regime that is forward looking and consistent with best practices. If we remain stuck to concepts such as wealth tax, we will only be doing a disservice to the otherwise sincere attempt made in writing up a new code that will hold the weight of revenue mobilisation for the next few generations.

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