Sustainable Taxation by Aarti Dhar in Hindu argues for improving progressivity in the country’s tax system and raise the much needed additional resources for financing education, healthcare and food security by taxing the super rich. The tax-GDP ratio at 15.5 percent in India is low compared to even countries like Brazil, Argentina and Turkey. It is suggested that India should step up collection of revenues from wealth and inheritance taxes. In addition if the government eliminates corporate exemptions and closes loopholes on tax avoidance, it is claimed that ‘India could easily raise up to 20-25 per cent of GDP as tax revenues, which is the amount that would be necessary to fund a modern welfare state that can deliver on its objectives of faster, inclusive, and more sustainable development’. In short make those who can afford (the rich) pay more taxes. No quarrel with asking the rich to pay more; but I would like to make three or four short points.
What is often forgotten is India is still largely a cash based economy where a number of incomes do not get registered at all. How many doctors, even the specialists who run swanky clinics, issue receipts for consultation fees or even display information about the charges. One waits with bated breath at the end of the consultation for the doctor to pronounce the fees. He personally accepts the cash puts in his drawer much like a kirana shop owner. Same applies, I guess, for other professionals like lawyers, architects, teachers taking tuitions, etc. During a visit to Rome in 2003, I learnt that a person buying any thing from any shop is bound by law to show receipt in respect of the purchases, if asked by the law enforcing authorities in the vicinity of the shop. So whether you buy a loaf of bread or a packet of chewing gum, there is a receipt issued from the cash register.
Tax to GDP ratio is a function of tax bases, tax rates and tax compliance. The last one is the most important. All the evidence actually points to revenue gains with lowering of rates and not the other way around. Take for example the real estate. Substantial portion of all real estate deals take place in cash. Most properties are registered for a fraction of the actual consideration based on guidance value. Even with such under reported property values, how many peoples actually pay capital gains tax? And what is the mechanism with the revenue authorities to track these transactions assuming there is a system of sharing information between registration authorities and the IT Department. Obviously, increasing tax bases and tax rates would result in more revenues only if there is a fail-safe mechanism of enforcement; and secondly, the taxation is seen to be reasonable and affordable. That lower taxation rates have actually improved compliance has been well documented.
Who is ‘rich’? Like poverty, richness is also relative. I once tried to send my teenage son on a guilt trip by telling him that the amount we spend on a movie in multiplex followed by dinner is equivalent to a month’s hard work (say 90 hours of labor) by the maid or the same as the man under tree outside ironing 600 pieces of clothes at Rs 4 a piece. He did not fall for it. He said if we just drive around the upscale residential areas, we will surely find houses where they would be paying their retinue of gardeners and drivers salaries equivalent to what I earn in a month. So the question is what determines our levels of incomes? Disregarding those who make money through illicit and illegal means, everybody would agree that each gets paid according to the value that the society (call it market) attaches to the service or goods that he or she produces. It is a question of demand and supply. On a scale of one to ten pure unskilled labor would rank lowest and highly intellectual and creative jobs at the other end of the spectrum. The unskilled and semi skilled labor in addition to being more plentifully available are also easier to replace with gadgets and therefore their values remain depressed. I know this is elementary economics. But somehow in all the debates about equity, the shrill cry to tax the rich sounds as though those earning more are undeserving of the fruits of their labour (or capital, if you will) and therefore must be made to pay a penalty for being rich. All those advocating this would surely not include themselves in the category of ‘rich’ even though they might be making a sum of money which would seem vulgar compared to what most poor do. Also it would be good not to forget the experiments with socialism across the world and the old adage that ‘one person will carry two buckets of water for himself, two will carry one between them and three will carry none’. There is an incentive system inherent in how different skills and knowledge are rewarded. It is again not my case that the market is always good in determining the value of goods and services – there are a lot of issues with it; but it is the best there is.
Lastly, a word about tax exemptions; I think the tax expenditure statement being placed in the parliament by FM in compliance with transparency requirements is both misunderstood and misused for spreading half truths. One must understand that not all taxes and duties are intended to raise revenues. They are also used to influence choice of consumers / investors by a set of incentives and disincentives. The recent case of increasing the import duty on gold is a case in point. It has been done to discourage buying of gold and to set the right the deficit in the current account balance. It might actually result in lowering revenues if it has the desired effect and also because it might result in smuggling and payments through informal channels. Conversely, if in future the import duty on gold is reduced it does not mean that the government has foregone revenues to benefit the ‘rich’; in fact it might improve the revenue collection as the people are encouraged to buy gold again and transactions move back to formal channels.
Finally, what the tax payer wants to know is whether the additional taxes mobilized by the government would go to funding additional schools, hospitals and roads or in buying choppers to ferry VVIPS or in maintaining a fleet of vehicles for a former chief minister who had all but prevented the government from functioning for the last year and a half; or, in reviving a economically unviable public sector unit like the Scooters India Limited. Poor governance acts as a disincentive and conversely tax compliance would improve if the governments were to effectively spend the monies that they collect.
Srinivas Kumar Alamuru
Adviser
[Disclaimer: Views expressed are those of the author and do not represent the views of CBPS]
We must also look at the question of what the Government wants to collect. i agree with Srinivas Kumar that more can collected via taxation in India. But we have a government that does not want to collect any more. This is because it has a philosophical position that apart from a few key services, the private sector can provide the services citizens need for a fee. Look at its health policy–on the one hand encourage private insurance via tax incentives; on the other encourage private investment in hospitals via tax holidays and the like. We need to elect a government that accepts the basic directions given in the Directives of State Policy—then this question will become one we must face.
As for tax incentives for health insurance, they operate only in respect of employers and employees in private sector. The tax holiday given for private investment is available only if a hospital with at least 100 beds is built in an area other than excluded area i.e. all the urban agglomerations. There is not the least doubt that the government must not exit from providing essential public services and goods – especially primary health care and education. However, there is no evidence to suggest that government is wanting to go back on its primary responsibility of providing basic services. They might be of poor quality, which is more a governance issue than a budget issue. Moreover, if it is the government’s philosophy to yield more and more space to private sector, there is even less reason for us to recommend that it should tax citizens more.
Hi Srinivas,
I agree with your views. The issue of taxing the rich, though seemingly obvious, is not quite so simple. We have seen in America how encouraging the rich helps invigorate the economy…..indirectly helping the poor.
Very good article.
Best Regards.
Sriram