At COP26, which ended in Glasgow last week, India rightly stressed that rich countries should help poor countries develop their renewable energy capacities. But the West is likely to be too selfish in paying all of its dues, and poor countries may well have to help themselves to make the transition that society urgently needs. One source of funding may well be the wealthy Indian citizens, who are getting richer and richer. A 2018 Oxfam report found that the richest 10% of Indians held 77.4% of the country’s wealth (up from 73% the previous year). In fact, according to the report, 58% of India’s wealth was in the hands of 1% of the country’s population (around 1% of the world’s population controls 50% of the world’s wealth). The combined income of that handful of people in 2017 was almost equal to India’s budget that year. In 2017, the fortunes of India’s 100 richest tycoons jumped 26%.
The IIFR Wealth Hurun India Rich List of 2019 identified the 953 richest families in India. He revealed that their wealth represented more than 26% of the country’s GDP, meaning that a 4% tax rate on the country’s 953 richest families would give the government the equivalent of one percent of the India’s GDP. According to Credit Suisse, the number of dollar millionaires in India has grown from 34,000 in 2000 to 7,59,000 in 2019 – in other words, the country has one of the “fastest growing millionaire populations.” in the world”. The average wealth of these millionaires increased by 74% during this period.
Surprisingly, the fiscal policy of the government, instead of letting the chessboard profit from this trend, actively reinforced it. One of the first decisions of the Narendra Modi government was to replace the wealth tax with a 2% income tax increase for households earning more than 10 million rupees per year. Then, the corporation tax was lowered, for existing companies from 30% to 22%, and for manufacturing companies incorporated after October 1, 2019 that started their activities before March 31, 2023, from 25 to 15%. – the greatest reduction of 28 years.
The EU budget aims to appeal to the middle class. In the 2019-2020 budget, the income tax exemption limit has been reduced from 2,000,000 to 2,50,000 rupees and the tax rate for income up to 5 lakh rupees has been reduced by 10 to 5%. Income tax of Rs 10 lakh has increased from Rs 1 10 210 to Rs 75,000.
This fiscal policy deprived the State of significant resources. To compensate (in part) for the drop in direct taxes, the government increased indirect taxes, unfairly, as they affect all Indians regardless of their income. The share of indirect taxes in state fiscal resources increased under the Modi government to reach 50% of total taxes in 2018, compared to 39% under UPA I and 44% under UPA II. Taxes on petroleum products are one example. Much has already been said about the large share of fuel sales taxes in government revenue. About two-thirds of the cost of a liter of gasoline now goes to taxes. The tax levied on gasoline and diesel has increased by 459% over the past seven years, from Rs 52,537 crore in 2013 to Rs 2.13 lakh crore in 2019-2020. Since oil is a less elastic commodity, people are forced to consume it even at higher prices. It also explains why the government views the sale of fuel in India as a safe way to ‘raise revenue’. The period between 2015-16 and 2020-21 saw significant double-digit year-over-year percentage growth in the contribution to the general treasury through taxes and duties, with no negative growth (except for fiscal year In progress). In 2018-2019, excise duties on petroleum products alone represented around 24% of indirect tax revenues.
Why is the opposition not exploiting this issue to its advantage? First, state governments receive their share of the fuel tax directly, which has dissuaded many state governments where the opposition is in power from protesting against rising fuel prices. However, most of the gasoline tax has belonged to the Center in recent years. Excise receipts (total contribution to the Public Treasury, i.e. taxes plus dividends paid to the government) from crude oil and petroleum products increased by 94% for the Center against only 37% for the States between 2014-15 and 2019-2020. Second, the composition of fuel prices, sale and use of revenues is a complex subject. And one of the most tested tools in a populist’s toolkit is to abbreviate things without context while giving them a spin.
The Modi government’s fiscal policy is likely to continue to prevail, although the price of oil has been reduced slightly recently to defuse tensions. The government will continue to display a pro-rich (and anti-poor) bias, depriving the treasury of some of the resources it needs to deal with issues as significant as climate change. These fundamental questions are likely to be debated by think tanks and chambers of commerce and industry in the near future.
This column first appeared in the paper edition on November 20, 2021 under the title “Time for a climate tax”. Jaffrelot is senior research fellow at CERI-Sciences Po / CNRS, Paris. Jumle is a graduate student in public policy