Q1. Inheritance tax was in news recently. State the differences between wealth tax and inheritance tax. Critically analyze the imposition of such a tax and need for reforms in the present direct taxes regime. 15 marks, 250 words)
Topic- Taxation in India:
Introduction:
An Oxfam Report named “Survival of the Richest” released in 2023 stated that from 2012 to 2021 40% of the wealth generated had gone to top 1% of the population. In this backdrop, there have been calls to impose an inheritance tax with its own pros and cons. This points at the structural issues that have been hollowing out the core of the India’s direct taxes regime.
Body :
- Differences between wealth tax and inheritance tax
- Merits of imposing inheritance tax
- Demerits of imposing inheritance tax
- Reforms required in the Direct Taxes Regime
Conclusion :
Inheritance tax has found its admirers because of the reeling poverty and high inequality post liberalization that profoundly impacted the Indian economy. But it comes with its baggage of grievous dysfunctions which can hamper entrepreneurial spirit obstructing full exploitation of India’s demographic dividend. Thus, there is a necessity to reform the present direct taxes regime to make it more progressive by reducing tax rates, broadening tax base and improving compliance so that it may satisfy every stakeholder who complements the economic growth of India.
UPSC Syllabus Taxation in India:
Why was this question asked?
Q. Do you agree with the view that, in a country like India, a tax on wealth would be a useful supplement to the income tax? Argue the case in the light of Raja Chelliah Tax Reform Committee Report. (UPSC CSE 1995)
Introduction
An Oxfam Report named “Survival of the Richest” released in 2023 stated that from 2012 to 2021 40% of the wealth generated had gone to top 1% of the population. In this backdrop, there have been calls to impose an inheritance tax with its own pros and cons. This points at the structural issues that have been hollowing out the core of the India’s direct taxes regime.
Body Status :
Differences between wealth tax and inheritance tax:
- Wealth tax is a tax imposed on earned income. It was levied at 1% of the net income of an individual earning above Rs. 30 lakh drawing its powers from the Wealth Tax Act of 1957.
- On the other hand, inheritance tax is imposed on unearned income of an individual like property or assets inherited from the parents. In India, Estates Duty was imposed as a variant of inheritance tax at a high rate of 85% drawing its powers from the Estate Duty Act, 1953.
- The Wealth Tax was abolished by the Union Budget 2016-17 and replaced by a surcharge of 2% on those earning above Rs. 1 crore annually. Inheritance tax was also abolished in 1985 due to administrative costs and concerns associated with collecting the tax.
- A wealth tax is not a one-time exercise; it is levied annually on the earned income. On the other hand, inheritance tax is levied only during the actual inheritance of property from parents. Thus, it is a one-time exercise.
Merits of imposing inheritance tax:
- Income inequality: The number of billionaires in the country increased from 101 to 166 between 2020 and 2022 at the height of COVID-19 crisis. This points at a regressive tax regime that perpetrates inequality thus solidifying the claims to impose inheritance tax.
- Political voice: Recent electoral bonds saga demonstrates that those super rich funding the political parties have a disproportionate voice in determining policies of the nation. Thus, the amount of wealth a person holds has become directly proportional to the strength of his political voice. This calls for such a tax to bolster the political voice of the poor and the marginalized by reducing inequality through such a tax.
- Demand generation: Any productive economy slows down if there is no consumption growth. High inequality hampers consumption consequently savings and investments. Demand generation becomes orphan in such a setup calling for the levying of an inheritance tax.
- Diversifying economy: Revenue generated from inheritance tax can fund diversified set of innovations by a broad spectrum of stakeholders owing to redistribution effect. Thus, it can diversify economic activities in the long term.
- Social expenditure: Japan has 55% inheritance tax despite being an advanced country. This has resulted in Japan having inequality less than the OECD average. Thus, inheritance tax can fund social expenditure on health, education and skill development improving the human development and reducing inequality in the long term.
Demerits of imposing inheritance tax:
- Money laundering: 1970s was the height of black economy in India. Hawala, underworld and political economy operated in tandem due to such wealth disincentivising inheritance tax.
- Flight of super-rich: According to the Henley Private Health Migration Report, around 6,500 millionaires rescinded their Indian citizenship in 2023 to permanently settle abroad. This affects the investment potential as these are angel investors watering Indian startups to become unicorns of the future.
- Dwarfism: A psychological conditioning may infest the commercial minds whereby any growth and wealth accumulation would be deemed as a futile effort as the government may absorb it in future. A sort of dwarfism in Indian companies with great potential might be witnessed that come short in capital, competition and scale with global majors like Walmart, Tesla, JPMorgan etc., in their respective fields.
- Tax expenditure: Estate duty was abolished in 1985. Redemptions, deductions, objective assessment and cost of collection made it an unattractive proposition. In this era of bitcoins and digital money, any such inheritance tax can drive honest tax payers to become tax evaders using cryptocurrencies and other such mechanisms.
- The case of China: As labor costs surge in China, complex manufacturing giants are exploring their bases in India to cut costs. This can drive employment and innovation in India. Inheritance tax, if proposed can make these giants lose their steam regarding shifting their base to India.
Reforms required in the Direct Taxes Regime:
- The composition of direct tax in the total tax revenue has gone down from 21% in 1970 to 14% in 1990. This points at the narrow tax base. Thus, broadening the tax base mitigating impact of regressive taxes (indirect tax) like GST is of great import to make India a $5 trillion economy.
- There is no tax on agriculture. Small farmers holding less than 2 hectares are at parity with an agriculturist holding 100 hectares. This hypocrisy in the name of food security has become a bane for the progressive taxation regime further driving inequality.
- Direct tax to GDP ratio in India is 6.5% versus 33% in OECD countries. Large companies claim enormous deductions effectively paying zero or nil taxes thus hampering overall development.
- There are more than half a dozen income tax slabs in India. Simplicity and compliance becomes a cruel joke in such a system inhibiting awareness and filing of taxes. Therefore, a direct taxes code is necessary to dismantle this Gordian knot.
- Enormous tax rates on corporations incentivized them to evade taxes through treaty shopping, tax avoidance, inaccurate financial statements etc. Thus, rationalization of tax rates on corporations cannot be overstated.
Conclusion
Inheritance tax has found its admirers because of the reeling poverty and high inequality post liberalization that profoundly impacted the Indian economy. But it comes with its baggage of grievous dysfunctions which can hamper entrepreneurial spirit obstructing full exploitation of India’s demographic dividend. Thus, there is a necessity to reform the present direct taxes regime to make it more progressive by reducing tax rates, broadening tax base and improving compliance so that it may satisfy every stakeholder who complements the economic growth of India.
Q2. Electric vehicles (EVs) are the future of sustainable transport. In the light of this statements critically analyze the benefits of adopting electric vehicles. Enumerate the steps taken by the government to drive its adoption and further reforms needed to drive their faster adoption. 15 marks (250 words)
Topic- Transportation sector:
Introduction
14% of all new cars sold are electric in 2024, a jump from 9% in 2021. This signals the rise of Electric Vehicles(EVs) as a sustainable transport option in future. From eliminating non-point pollution to promoting fuel efficiency, EVs have cross-sectoral benefits. Notwithstanding this, they face multidimensional challenges to their smooth rollout amidst the government taking innovative measures to drive their adoption.
Body
- EVs are the future of sustainable transport
- Challenges in the adoption of EVs
- Steps taken by the government to drive adoption of EVs
- Further reforms necessary for their faster adoption
Conclusion
Electric Vehicles (EVs) are a part of any country’s plan to greening their transport sector. This contributes Intended Nationally Determined Contributions made at UNFCCC by individual member nations along with providing green jobs to millions of individuals. To fructify this, the inherent issues plaguing the EV ecosystem must be tackled in a time bound manner. Innovative measures covering safety, reusability and better standards can go a long way in fulfilling the green mobility vision of any country through the faster rollout of EVs.
UPSC Syllabus Transportation sector:
Why was this question asked?
Q. What are the alternative fuels available for the transport sector? Discuss their characteristics, advantages and disadvantages in their utilization. (UPSC CSE 2007)
Introduction:
14% of all new cars sold are electric in 2024, a jump from 9% in 2021. This signals the rise of Electric Vehicles(EVs) as a sustainable transport option in future. From eliminating non-point pollution to promoting fuel efficiency, EVs have cross-sectoral benefits. Notwithstanding this, they face multidimensional challenges to their smooth rollout amidst the government taking innovative measures to drive their adoption.
Body
EVs are the future of sustainable transport:
- Green transport: Global temperatures have gone past 1OC since the advent of industrial revolution. A green transport option that doesn’t trap greenhouse gases like the fossil fuel transport is the need of the hour.
- Energy security: 80% of the fossil fuel needs of India are met through imports. India pumped nearly $132 billion in 2023-24 for crude oil imports with the trade deficit expected to reach $276 billion in 2025. Thus, EVs can be a source of energy security for India by cutting down fuel imports for the transport sector.
- Urban Heat Island effect: Urban congestion and entrapment of effluents can increase the temperature of central business district by 2OC compared to the peripheral areas. This Urban Heat Island effect can be mitigated by faster adoption of EVs.
- Fuel efficiency: EVs convert 77% of the energy from grid into power at wheels versus 12%-30% of the energy stored in gasoline being converted into power at wheels by fossil fuel vehicles. Thus, EVs are fuel efficient than conventional vehicles that run on gasoline.
- Resource efficiency: Less moving parts in EVs means less repairs and minimal need to extract resources. Plastic parts in EVs can be recycled and reused. Thus EVs are a shining example of resource efficiency.
Challenges in the adoption of EVs:
- Raw material: China based battery makers named CATL and BYD have more than 50% market share in lithium ion batteries. Along with this, few countries have lithium mines which pose challenges to raw material supply chain resilience. Thus, adoption of EVs is not a walk on the cake as far as raw material supply is concerned.
- Chemical hazard: Lithium ion batteries have known carcinogenic chemicals. Their improper disposal and recycling poses threat to human, animal and ecosystem health: thus jeopardizing the one health concept.
- Accidents: India is a tropical country. Optimum operating temperatures for lithium batteries is from 15OC to 35O Frequent heatwaves have led to fatal battery explosions affecting the unhindered adoption of these EVs.
- Supporting infrastructure: Charging stations and battery swapping units are suffering from lack of standardization. This along with intermittent power in some regions has affected adoption of EVs.
- Not truly green: India relies on thermal power for more than 65% of its energy needs. Considering this, one can question whether EVs that run on electricity produced from fossil fuels are truly green?
Steps taken by the government to drive adoption of EVs:
- State specific policies: Assam has been providing subsidy on 2 wheelers as a percentage of the showroom price to ensure their faster adoption.
- Tax exemptions: Under Section 80EEB of the Income Tax Act, EV buyers can avail tax exemption upto Rs. 1.5 lakh for the interest paid on the loans raised against EVs.
- PLI Scheme for Automotive Sector: Rs. 25,938 crore was earmarked to develop manufacturing ecosystem for advanced automotive components that complement the EV manufacturing ecosystem.
- PLI Scheme for National Programme on Advanced Chemistry Cell Battery Storage: Rs. 18,100 crore was earmarked for 7 years in 2021 to build a battery manufacturing ecosystem in India to cater to the local demand.
- FAME India Scheme: 7,000 e-buses, 5 lakh e-3 wheelers and 10 lakh e-2 wheelers are being supported under the FAME II launched in 2019 with an outlay of 10,000 crores.
Further reforms necessary for their faster adoption:
- Battery swapping policy: Unifying the battery specifications through a government policy can streamline the rollout of battery swapping infrastructure, thus owning EVs will become an attractive proposition.
- Special e-mobility zone: Special zones must be created where only EVs can be operated in line with the global examples like that of Europe and China.
- Duty reductions on electric vehicles: States have been imposing one-time lifetime tax on EVs. This has to be rescinded for the sake of faster adoption of EVs amidst rising fossil fuel prices driven by crisis in West Asia.
- Safety standards: BIS must lay down standards for lithium ion batteries. This may prove to be fruitful in averting fatal accidents and induce better resilience to increased operating temperatures.
- Standardization: Standardization of charging ports and battery slots have been a persisting demand from concerned stakeholders. This can complement the charging infrastructure by improving their efficiency and use value.
Conclusion
Electric Vehicles (EVs) are a part of any country’s plan to greening their transport sector. This contributes Intended Nationally Determined Contributions made at UNFCCC by individual member nations along with providing green jobs to millions of individuals. To fructify this, the inherent issues plaguing the EV ecosystem must be tackled in a time bound manner. Innovative measures covering safety, reusability and better standards can go a long way in fulfilling the green mobility vision of any country through the faster rollout of EVs.