Wealth Redistribution row: What was Compulsory Deposit Scheme (CDS) introduced by Congress in 1963, 1974?

Sam Pitroda's statement on inheritance tax has triggered a row amid the ongoing Lok Sabha elections 2024. Pitroda, chairman of the Indian Overseas Congress, called upon the need for policy toward wealth redistribution in India and elaborated on the concept of inheritance tax prevailing in the US.

The debate started following a statement by Congress leader Rahul Gandhi, asserting that if the grand old party is elected to power in the Lok Sabha elections, it will initiate an economic audit to determine the distribution of the nation's wealth. Subsequently, measures would be taken to redistribute it accordingly.

To this, Pitroda said: "In America, there is an inheritance tax. If one has 100 million USD worth of wealth and when he dies he can only transfer probably 45 per cent to his children, 55 percent is grabbed by the government. That's an interesting law. It says you in your generation, made wealth and you are leaving now, you must leave your wealth for the public, not all of it, half of it, which to me sounds fair."

"In India, you don't have that. If somebody is worth 10 billion and he dies, his children get 10 billion and the public gets nothing...So these are the kinds of issues people will have to debate and discuss. When we talk about redistributing wealth, we are talking about new policies and new programs that are in the interest of the people and not in the interest of the super-rich only," he added.

The inheritance tax discussion has triggered a row between the two main parties. 

Taking a dig at the idea, PM Narendra Modi on Wednesday said: "The advisor (Sam Pitroda) of the 'prince' and the 'royal family' had said some time ago that more taxes should be imposed on the middle class. Congress says that it will impose an inheritance tax, and it will also impose tax on the inheritance received from parents. Your children will not get the wealth that you accumulate through your hard work, rather the claws of the Congress government will snatch it away from you."

Amid the political firestorm, several social media users and BJP leaders mentioned that the Congress in the 1960s and 1970s implemented a scheme, Compulsory Deposit Scheme (CDS), that mandated taxpayers to mandatorily deposit a portion of their earnings for a period of three to five years.

What was Compulsory Deposit Scheme?

In 1963, the Congress under then Finance Minister Morarji Desai introduced the Compulsory Deposit Scheme bill in the Union Budget. The legislation was brought after the first National Emergency was declared in 1962 during the India-China War. The bill was brought in "in the interest of national economic development".

The Act applied to all taxpayers, property owners, and all government employees, under which they were asked to deposit a certain percentage of their salary, revenue generated from land use, urban property, etc. 

"The scheme of compulsory deposit is somewhat novel and unorthodox, which we have had to undertake in the situation created by the Emergency," Desai said while introducing the bill.

In his speech, Desai said the scheme would "restrain demand in the immediate future" besides helping in inculcating a "saving habit in the country".

The Compulsory Deposit Scheme 1963 stated: “An Act to provide in the interest of national economic development for compulsory deposit and for the framing of a scheme in relation thereto.” 

It adds, “This Act shall apply to the following categories of persons, 

namely:—

(a) persons liable to payment of land revenue

(b) persons liable to payment of tax under the Income-tax Act;

(c) holders of immovable properties situated in urban areas assessed to tax 

(d) employees of—

(i) the Central and State Governments,

(ii) local authorities,

(iii) companies as defined in section 3 of the Companies Act, 1956 (1 of 1956), including foreign companies 

(iv) any other corporation (including a cooperative society) established by or under a Central, Provincial, or State Acts,

(v) individuals or associations of persons or bodies of individuals liable to payment of tax under the Income-tax Act

(e) dealers …

(f) such other categories of persons whose annual income is one thousand five hundred rupees or more and who are not liable to payment of tax under the Income-tax Act, as may be specified by the Central Government by notification in the Official Gazette.

The Act was reintroduced in 1974, a year before before the Emergency was imposed by then Prime Minister Indira Gandhi, and then taxpayers were asked to deposit up to 18% of their incomes under this scheme. The deposit was withheld for a period of 3 or 5 years. Dr Manmohan Singh was the chief economic adviser of the government.

The law came amid all-time-high inflation of 28.6% and faced severe backlash from the Opposition at the time as the economy was seeing the effects of the 1971 Bangladesh Liberation War between India and Pakistan.

In the 1974 version of the legislation, the deposit rates were fixed between 4%-18% of the incomes of individuals. The scheme was applicable to agricultural incomes as well this time.

Individuals with incomes ranging from Rs 15,000 to Rs 25,000 were required to deposit 4% of their current income. For those earning over Rs 70,000, the requirement was a base deposit of Rs 7,100 plus an additional 18% on any income exceeding the Rs 70,000 threshold.

The mandatory deposit scheme was not popular due to its immense tax liability. In anticipation of the 1984 Lok Sabha elections, the Congress party pledged in its electoral manifesto to repeal this compulsory deposit requirement for taxpayers.

In a post on X, former economic advisor Sanjeev Sanyal called the scheme draconian. 

"The Compulsory Deposit Scheme (ITP) Act 1974 forced taxpayers to deposit up to 18% of income in the scheme. Given the high inflation rates of that time, this was draconian by any standards. Given the inflation rates of that time, the 1963 & 1974 schemes effectively amounted to expropriation," Sanyal said.