Analyst Shankkar Aiyar advocates taxing the rise in stock market wealth in 2020-21 — the exact rate should be left to politicians — of all dollar billionaires (assets over Rs 7,300 crore). For simplicity, the tax will apply only to listed shares (whose increase in value is transparent) and not unlisted shares, property or jewellery (which cannot be valued accurately and will spark litigation).
This sounds morally attractive. Proponents say a one-time tax for 2020-21 should not affect future investment and markets the way a permanent wealth tax (urged by Thomas Piketty and others to promote a fairer society) would. The tax will affect just 100 or so Indian billionaires, whose stock-market wealth has risen by an estimated Rs 13 lakh crore since last March. Some billionaires might even welcome a one-time transfer to the poor.
Alas, this will fail. The government may claim this is a one-off tax, but few will believe it. Past experience (ask Vodafone or Cairn) means the credibility of Indian politicians is almost zero in tax matters. Covid could continue for years if new strains appear, and so could the proposed tax. India competes with other markets for global money of foreign institutional investors (FIIs). If India alone levies this tax, billions will shift to rivals.
FIIs own the bulk of the floating stock of big Indian companies. If FIIs pare their holdings even modestly, stock markets will crash, hitting private investment and spending. It will hit government plans for IPOs, privatisation, and asset sales. This will slow the economy and reduce revenue from all other sources, probably offsetting any revenue from the new tax.
When Covid struck and FIIs withdrew Rs 62,000 crore in March, the Sensex crashed from 41,000 to 26,000. But recently FIIs have flooded back, bringing Rs 60,350 crore in November and Rs 62,016 crore in December. That has sent the market soaring. A Covid tax could reverse this inflow, causing havoc. In theory, FIIs could be exempt from the Covid tax, but that would mean unfair discrimination against Indians. It would also unfairly penalise shareholders compared with holders of bonds.
Fortune magazine gives huge estimates of billionaire wealth, but this is not individually held wealth. Most companies are controlled indirectly through trusts, offshore vehicles, unlisted companies, and other financial devices. The Tata group is controlled by the Tata Trusts, which are exempt even from income tax. If a one-time tax is applied only to individuals and not to all these other bodies, it will be manifestly unfair. Nor will it raise much revenue. Any attempt to tax all these other entities will create a stock market crash, much litigation, and diversion to black money.
Taxing an increase in stock market wealth is a sort of wealth tax. In her “Garibi Hatao” prime, Indira Gandhi raised income tax to 97.75% and wealth tax to 3.5%. This raised little revenue, but crushed private industry, stock markets and the economy. Businessmen used every possible trick, legal and illegal, to divert wealth and income to less-taxed or untaxed vehicles including unlisted companies, trusts, black money hoards, and money sent abroad through dubious means. Showing true profits in company books meant a higher share price, hence higher wealth tax, and hence forced sale of a businessman’s shares to pay that tax. Rather than slowly commit economic suicide this way, businessmen diverted profits off the books, forced share prices to fall and so reduced their wealth tax liability.
One of Manmohan Singh’s major reforms as Narasimha Rao’s finance minister was to abolish wealth tax on shares. This made it rational again to keep profits on a listed company’s books, raise share prices, and benefit the exchequer as well as small shareholders. Creating shareholder wealth is a social goal that will be hard hit by taxing shares, even a supposedly one-time Covid tax.
Piketty recognised that the rich would shift their money to tax havens if a country levied a wealth tax. So, he advocated for a global wealth tax. That is not in sight.
Till recently, India levied wealth tax on property, jewellery and many other assets (but not shares). This was abolished in 2015 since the cost of collection exceeded the miserly revenue of Rs 1,000 crore. Lesson: a Covid tax may raise little money while creating havoc.
Reducing inequalities — a separate goal — requires other approaches. Let the RBI simply print the extra money needed, avoiding the risks of a Covid tax.