India must avoid copying China's aggressive tax policies on private wealth and offshore assets

China's tightening the tax net around its HNIs. Beijing levied a 20% I-T from offshore trusts in July, as well as on gains on assets moved into them, with a 90-day window to settle unpaid dues dating back to 2023. Tax offices in Beijing and Hangzhou have also begun taxing returns on offshore insurance policies. These aren't necessarily new taxes but stricter enforcement of existing taxes. Some also believe Beijing may introduce inheritance taxes.

Developing economies often look to the US and China for cues on taxation, infra spending and policy. India, for one, must steer clear of emulating such tax policies.

China's circumstances are materially different from India's. Its economy has slowed, and its government finances are under pressure. Its property market has endured prolonged stress, denying a key revenue source for local governments. Land sale revenue has had four straight years of double-digit decline.


India's economy is expanding at a healthy pace, and housing is rising steadily. A policy that suits an economy grappling with a property bust can trigger different consequences in one still building its capital base.

Capital is generally deployed more efficiently when it stays with individuals and enterprises that generated it. The state should retain what it needs for pivotal assets and essential revenue expenditure.

The rupee, retained by a productive company, can fund a new factory, technology, research, hiring or expansion. Retained by a household, it becomes savings, investment or consumption. Each can set off another round of economic activity. The same rupee channelled through government can create significant value only when it goes into productive infrastructure. But this depends on the efficiency of deployment, which usually can't match the traction and momentum on the private side.

This is not an argument against government spending. GoI has credibly done the heavy lifting by boosting capex when private investment was weak or selective. But rather than look for ways to enlarge GoI's share, India should focus on getting more output from every rupee it spends. Better focus, smart deployment and stronger outcomes should take precedence over raising taxes, or expanding recurring expenditure without corresponding productivity gains.

Increasingly aggressive interpretation or enforcement of existing provisions can have unintended behavioural consequences. Businesses can become cautious about investing. Households may save and spend differently. So, the objective should be to maximise economic activity and productivity.

There is another lesson from China that developing economies like India should learn. Since China joined WTO in Dec 2001, average income of its citizens has risen dramatically, from just over $1,000 to over $14,000. Much of that transformation occurred during a period of economic opening, investment, manufacturing and global trade integration, rather than aggressive taxation of private wealth. Today, China is also spending heavily to match the US data centre boom and build next-gen infrastructure. These are the trends worth emulating.

For India, the lesson is simple. Taxation should fund growth, not inadvertently tax sources of growth. GoI has built much of the platform. The next phase should allow individuals and enterprises to deploy capital, take risks, invest, consume and build. That is the virtuous cycle India should seek to strengthen. China's tax squeeze must not be a template for India.