According to Paris-based economist Thomas Piketty, income inequality in India is so great that it warrants introduction of wealth and inheritance taxes on the top 10 percent of the country’s rich. Evidently, Piketty is not sufficiently informed about the profusion of taxes already imposed upon every citizen of India, starting with the middle class which is only relatively wealthy. The threshold for payment of income tax is perhaps the lowest worldwide with every citizen earning an annual income exceeding Rs.3 lakh ($3,507) per year obliged to pay tax to the Central government under this head. Yet because of hare-brained Soviet-inspired socialism adopted as national ideology in the immediate aftermath of independence, the annual incomes of the general populace are so low that a mere 3 percent of the population pays income tax.
Most of the revenue resources of the Central and state governments accrue by way of indirect taxes which are payable by all citizens. Of them, the major taxes are excise and sales tax recently codified into GST (Goods and Services Tax) payable in various ‘slabs’ ranging from 5-28 percent on all goods and services bought and sold countrywide. In the latest Union Budget 2024-25, the excise tax revenue of the Union government was Rs.3.18 lakh crore and Rs.10.67 lakh crore by way of GST. These two indirect taxes contribute 46 percent of the total revenue (Rs.30 lakh crore) of the Government of India, more than progressive direct taxes (36 percent).
Moreover, there is a plethora of other indirect taxes payable by the citizenry on highways, airports, bridges, state government levies on property, petroleum, tobacco, and liquor. To all this, add the ‘tax’ that government officials levy on every citizen-officialdom interaction.
Therefore, the solution isn’t to raise tax rates for wealth and jobs creators because over-taxation is disincentivizing, prompts tax evasion and capital flight. In the circumstances, it might be in the greater national interest to leave a larger share of income in the hands of businessmen and citizens for saving and investment. It’s also pertinent to bear in mind that what governments don’t spend on themselves and on official pomp and grandeur, they invest in white elephant public sector enterprises that seldom yield returns, or in development projects in which high salaries and perks of officials leaves precious little for project implementation. That’s why huge cost over-runs are normative in government development projects.
Therefore, it makes much better sense to leave more money in the hands of businessmen and entrepreneurs to save, invest, prosper and pay greater taxes even as marginal tax rates remain stable. While Piketty & Co’s intent to reduce income and wealth inequality is laudable, they have not factored government inefficiency, inertia and corruption into their tax-and-spend model.