India Doubles Exemption Limit for Wealth Tax

The Indian finance minister has proposed to raise the threshold limit for the levy of wealth tax from the existing Rs 15 lakh to Rs 30 lakh (ca. USD 62k) starting March 31, 2010. The tax rate of 1 per cent of the net wealth of every individual, Hindu undivided family and of a company, however, remains the same. The proposed amendment should provide for inflation-adjustment and adjust the tax system to the growing wealth in India.

It is questionable if these announced changes would be a sufficient response to the changes of the Indian economy and tax base. Firstly, the current limit of 15 lakh was set in 1992. In the last 17 years the cost of inflation index used for tax calculations, however, not only doubled but also went up by almost 150%. Secondly, experiences in other countries show that wealth taxes cause very high administration costs. The increase in the exemption limit will reduce the numbers of wealth tax payers even more without reducing the costs involved in collecting the tax. A disproportionate effort for a tax, which has a current share of less than 0.1% of the gross tax revenue collected in India.

In Europe alone seven countries eliminated the wealth tax in the last 5 years and it would be advisable for the Indian government to follow these examples in the next tax reform.