Looking at the ever-increasing size of the Union Budget, doubling every three years, Finance Ministers are hard pressed to generate resources to meet the Central Government’s ballooning expenditure. Competitive populism dictates that more and more money is spent on handouts and freebies every year, and except for some token gestures like doing away with senior citizen concession on train travel, nothing much is done to curb expenditure. All parties, both at the Centre and in States, pay lip service to elimination of subsidies and freebies, but promptly forget their promises once elections are announced.

A situation has emerged where one political party’s welfare expenditure is another party’s freebie, and viceversa. The Central Government, whenever it needs extra funds, often takes short cuts like increasing GST rates or playing around with Central Excise levies on petroleum products. This is child’s play for the Government, since the Centre now controls all significant levers of taxation; Direct Taxes through Income-tax, and almost all Indirect Taxes through GST. State Governments follow the Centre’s lead, wherever they can.

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Such ill-thought measures affect citizens adversely, because incidence of tax i.e., the particular segment of the population that has to pay the tax, is rarely one of the considerations. Even otherwise, Indirect taxes hit the poor more; according to the latest Oxfam report “Survival of the Richest: The India Story,” a little less than two-thirds (64.3 per cent) of the total GST is paid by the bottom 50 per cent of the population, one-third of the GST is collected from the middle 40 per cent, and only 3-4 per cent from the richest 10 per cent of the country.

Another toxic method is to resort to deficit financing. According to the Fiscal Responsibility and Budget Management (FRBM) Act 2003, fiscal deficit was to go down to 3 per cent of GDP by 31 March 2008, and reduce annually by 0.3 per cent thereafter, yet the fiscal deficit on 31 March 2024 is estimated at 5.8 per cent ~ far in excess of what was originally envisaged. Also, according to FRBM, Central Government Debt should not exceed 40 per cent of GDP by 2024-25, but according to Budget Estimates, Central Government Debt is slated to touch 82.4 per cent of GDP by 31 March 2025. The ills of uncontrolled State borrowing are many; it is a debt we incur, but which is repaid by future generations. Almost two and a half centuries ago US President Thomas Jefferson had observed: “The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

Thus, there are many good reasons for reducing Government expenditure. Unfortunately, all such reasons pale into insignificance in the face of compulsive populism. The FRBM Review Committee Report made a host of recommendations for ensuring fiscal prudence, including the setting up of an autonomous Fiscal Committee to manage fiscal strategy. None of the Committee’s recommendations have been implemented. Also, the Fifteenth Finance Commission had recommended a review of Central Schemes, with axing of unviable ones. However, Revised Estimates for Financial Year 2023- 24, show an expenditure of Rs.19.06 lakh crore on Central Schemes, out of total Budget expenditure of Rs.44.90 lakh crore, with no review of Central Schemes in sight. Obviously, an efficient tax system along with a brake on profligacy can help the Government balance its books.

But, sadly, in the recent past, no thought has been paid to the review of the overall taxation structure. Even in the third decade of the twenty-first century, Direct and Indirect taxes operate in different silos in India, never mind that most advanced countries, including UK and USA, have integrated both long ago. The first report of the Tax Administration Reforms Commission (headed by Dr Parthasarthy Shome), submitted on 30 May 2014, suggested integration of the two Revenue Boards, but even this suggestion got lost in the turf wars of North Block. Post-Covid, when the West faced economic uncertainty, certain ultra-rich public minded citizens, came forward offering to pay extra tax, to rescue their governments. No corresponding movement was seen in India, but the public noticed that in Covid times, when ordinary citizens faced extreme distress, certain categories of businesses like pharmaceutical companies and pharmacists, online retailers etc., made extraordinary profits.

In India, post-Covid, after a K-shaped economic recovery, though strenuously denied by Government agencies, the difference between the rich and poor has exacerbated, which has drawn the attention of a host of international agencies, including Oxfam and UNDP. Recently, a paper titled “Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj” authored by Thomas Piketty, Lucas Chancel, and Nitin Kumar, stated bluntly: “By 2022-23, top one per cent income and wealth shares (22.6 per cent and 40.1 per cent) are at their highest historical levels and India’s top one per cent income share is among the very highest in the world, higher than even South Africa, Brazil, and the US.” Notably, the share of the top 1 per cent was 6.1 per cent in India’s wealth and income in 1982, which rose steadily thereafter, with the rise being much more pronounced during the Covid period.

Currently, according to Hurun Research Institute’s 2024 Global Rich List, India is home to 271 billionaires, with 94 new billionaires added in 2023 alone. The number of new billionaires added last year is more than in any country, other than the US. The billionaires’ collective wealth amounts to almost US$1 trillion ~ nearly 7 per cent of the world’s total wealth. The Chancel, Piketty and Kumar Report also stated that more government expenditure on health, education, and nutrition was required to improve the lot of average Indians, so that the fruits of economic progress and globalization could trickle down to them.

The Report has prescribed a “super tax” of 2 per cent on the net wealth of the 167 wealthiest Indian families in 2022-23 which would garner 0.5 per cent of national income in revenues, and “create valuable fiscal space to facilitate such investments.” This is a worthwhile suggestion. Myriad anomalies have crept in the Indian taxation system, which was conceptualised by Nicholas Kaldor in the 1950s and implemented in the early 1960s (See “Taxation Travails,” 5 March 2024). Raising more revenues, the way the Government does it, i.e. by increasing GST rates, would only lead to more burdens for the poor. Probably, the required revenue for social sector spending could be generated by levying wealth tax on individuals holding assets in excess of Rs.100 crore, as also inheritance tax on inheritances above Rs.100 crore.

Needless to say, concentration of wealth will also get diluted, to some extent, by these taxes. The two main objections to re-introduction of the Wealthtax and Inheritance Act are: These taxes were discarded long ago because of difficulty in computation and also because they did not yield a significant amount of revenue. These objections are easily met. Presently, almost the entire wealth of the ultra-rich is held in financial assets like shares, mutual funds etc. which are liquid, divisible and easily valued in a transparent manner. Secondly, these taxes will affect only a minuscule proportion of taxpayers, which will ensure proper supervision by tax authorities, but as seen above, would result in generation of a sufficient amount of revenue.

Also, because of the liquid nature of the majority of assets, ‘hardship cases’ of children rendered homeless after a parent’s death due to inheritance tax, or holders of immovable property not being able to pay wealth-tax, will be few and far between. Then, there could be exemption clauses for a certain value, or for a certain asset class, or for both. In the ultimate analysis, taxation is a necessary evil for a civilised nation. As Oliver Wendell Holmes Jr. had said in one of his famous judgements: “I like to pay taxes. With them, I buy civilization.”

(The writer is a retired Principal Chief Commissioner of Income-Tax)