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Tax Evasion

Nehruvian India’s obsession with socialism and progressive taxation jacked up the income tax on individuals to over 90 per cent. Tax evasion became an art and a craft as a result, and most sections of the people reveled in evasion whether politicians, bureaucrats and most segments of business and industry. The virus did not spare even some sectors of education, whether kindergarten, engineering or medicine.

Tax Evasion

(Representational Image: iStock)

Emperor Asoka, when he turned Buddhist, began the practice of spending from the state coffers to promote the new faith. A large number of monasteries were constructed. Some of them are still in existence, and are magnificent structures, difficult to forget for those who have visited them even once. I saw the cave monasteries at Karla and Bhaja which can be reached from Lonavala on the Mumbai-Pune highway. If one is sufficiently interested in caves, it would be difficult to finish the visit in less than a day. The caves at Ellora and Ajanta are masterpieces of sculpture; little wonder that they are worldfamous.

After decades now, I still occasionally see the Buddha at one of the Ajanta caves, with three faces, in my dreams. One face is smiling, the same head from a different angle pensive, while the third is palpably immersed in deep thought. Too much praise has been repeatedly lavished to bear repetition here, about the frescoes of Ajanta. The money spent on the many caves was debited to the state treasury filled with the help of taxes collected from the citizens of the Asokan, i.e., Mauryan Empire. The taxpayers comprised admiring Buddhists and Hindus and Jains of Asoka’s domain.

The non-Buddhists resented religion being sponsored at the cost of the state, which in turn had gathered funds from people’s hard earned money. Arguably, one can say that this was the beginning of the phenomenon of tax evasion in India, in a way with silent social approval. With time, evading tax became a practice that solidified into a tradition. The British rulers must have known this and therefore did not introduce direct income tax until 1931, only 16 years before their final departure from India. After the 1929 Great Crash on the Wall Street and the ensuing world economic slump there was no choice but to tax those who earned a profit and to contribute to the state treasury.

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In sharp contrast, merchants minted money during World War II. The scope to raise money elsewhere was exhausted. By 1946, evasion had already reached levels that called for intervention. One afternoon my father came home with two one thousand- rupee notes. He had been virtually forced by his colleagues to buy them at Rs 600 each. When he submitted them to his bank the next morning, he was given Rs 1,000 each. That was the result of demonetization which I saw at the age of nine. We then saw a similar phenomenon when Morarji Desai was Prime Minister (1977-79). The last demonetisation in 2016 was more drastic with the objective of reducing India’s black economy, which was widely believed to be some 40 per cent of the total.

It has shrunk as a result of the step taken. From the time of Qutbuddin Aibak in 1206 AD, north India had to endure foreign rule until 1947, a period of nearly 740 years. Most Indians could not identify with the foreign rulers and felt no obligation to spontaneously pay taxes. During his Non-Cooperation Movement Gandhi exhorted the people not to pay taxes. Where the citizen spontaneously feels that it was his duty to pay ~ or else how can the country be administered ~ the situation is different. One has to iterate here that this is not to say the Indian is any less honest than other people around the world. When it comes to dues to be paid in cash, whether in property purchase or any other transaction, one has never heard of the seller being short changed.

It is not often that an individual owing money to another individual backs out. Where many do not show conscience is when the creditor is a corporate body with no human face, especially a government organization. The Muslim rulers were focused on jaziya but had no equivalent of excise duty or income tax. The land revenue was raised through the subedar and his local network. The British were aware of the Indian aversion to paying taxes and found their own ways of raising money to run their empire. Excise Duty, Sales Tax and Octroi were their innovations; zamindars and jagirdars were an indirect approach. They held back direct taxation or income tax until 1931.

In contrast, the rulers of independent India, until very recently, understood the least. Nehruvian India’s obsession with socialism and progressive taxation jacked up the income tax on individuals to over 90 per cent. Tax evasion became an art and a craft as a result, and most sections of the people reveled in evasion whether politicians, bureaucrats and most segments of business and industry. The virus did not spare even some sectors of education, whether kindergarten, engineering or medicine. More to the point, hardly anyone was embarrassed to talk of the black economy. In fact, pundits called it the “informal economy” and still do. They even pleaded for talking steps to nurse it through the recession caused by the 2016 demonetisation.

At a guess, two-thirds of the trading in the country was a part of this informal sector. Way back in 2007 when a slump was predicted for 2008, one such pundit had assured me that nothing much would happen to the Indian economy as long as the informal sector existed. He proved right; what he did not admit was that the informal sector does not enable the economy to grow. It acts like opium and a lot of the cash gets sucked into nonproductive areas; the economy therefore, does not grow to its potential. Ideally, every surplus rupee should be invested immediately so that it helps to produce new goods ready for sale. More ideally, more rupees should be either borrowed or even printed by the government (deficit financing) for producing new goods and services.

The only precondition is that the new production should be so quick as to be further productive and not be a burden on the economy that causes inflation. The Chinese displayed extraordinary imagination when their government allotted land almost for free, provided loans at one or two per cent interest to acquire the machinery and marked out special industrial zones wherein wages were fixed between the workers and employers. The state thus went a long way to lay out its currency; in return it insisted that (approximately) 75 to 80 per cent of the sale value had to be in hard currency out of exports. Over the years, I have mingled with people of different classes, professions and ideologies.

The feedback has been fascinating. Comparatively, few people realise that the State cannot run unless there is collection of money to pay for its employees from the Rashtrapati downwards to the humblest peon and chowkidar. Then the soldiers, the entire military and all the weaponry have to be paid for. When in Parliament, I witnessed discussions on the Railway budgets, which lasted three to four hours. The chief whip did not give me an opportunity to participate as he felt there were many members who normally did not speak and would be keen, whereas I spoke on many subjects.

The most popular aspect was the demand for broad gauge to be introduced in one’s constituency, lockable gates at the crossings where there were none and the quality of food served during travel. In a parliamentary session in 1999, the discussion on food lasted for well over two hours. The subject was halal and what could be done to help those passengers who did not eat jhatka dishes. The arguments went on and one until, about two hours later, it was resolved peaceably that no meat should be served; only shakahari or vegetarian should the diet on the trains for all. The flag of Indian secularism was thus unanimously unfurled. Railway tickets were a purchase like any other and the less one paid, the better it was.

If one could avoid paying, all the better, although the attitude was more lenient than when it came to payment of tax, where every rupee was to be avoided if possible. Many a practitioner of the legal profession made a subtle differentiation between tax avoidance and tax evasion. The former was ethical as well as legal. The moral of this entire story is that most Indian people are unaware of the equation between the citizen and the State when it comes to what he/she gets and what he should pay and why. The State cannot run without taxes. When Chinese and Pakistani guns boom, what is New Delhi supposed to do? From where are the funds for defending the country to be obtained? It has to be borne in mind that most citizens do not have to pay taxes.

(The writer is an author, thinker and former Member of Parliament)

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