Taxing times

Rupee, Historic low, Government, Pep talk

(Photo: AFP)

We live in contradictory times. Our economy is the fastest growing in the world but at the same time our currency is in a tailspin, our corporates are going belly up and we are facing an employment crisis. Also, paradoxically, farmers are raising bumper crops but farming is fast becoming wholly unviable. Band-aid solutions are being tried out to cure the various malaise infecting our economy.

For example, to shore up the falling Rupee, the Government announced some half-hearted measures like waiving withholding tax on masala bonds but in less than three weeks the Rupee depreciated a further 7 per cent. Similarly, the recent import duty hike on 19 items, designed to narrow the Current Account Deficit, has only fuelled inflation, increasing air fares in particular. The Government’s 50 per cent increase in MSP and initiatives like Tomato, Onion and Potato (TOP) did not bring any succour to farmers; acute agricultural distress has brought protesting farmers to the national capital.

The one glaring omission in the Government’s efforts is a comprehensive economic policy, which is not surprising given the fact that the last economist we had as Finance Minister was Dr. Manmohan Singh. The result has been an uneven growth of our economy; the last financial year saw a growth of 18 per cent in the wealth of Indian dollar billionaires ~ only one percentage point more than that of persons having a fortune between $100 million and $1 billion. These figures mean that a disproportionately large proportion of the wealth created went to the super-rich.


According to Boston Consulting Group’s (BCG) ‘Global Wealth Report 2018’, 50 of the richest Indians own 16 per cent of our wealth. Such huge concentration of wealth is neither socially nor economically desirable; in addition to fomenting social unrest, extra wealth in the hands of the super-rich mostly lies idle or is used for conspicuous consumption.

Moreover, scarce resources get frittered away in catering to fancies of the rich. The healthcare industry is a glaring example of this phenomenon; we have no dearth of world class super speciality hospitals but we have very few facilities offering affordable healthcare because there is huge money to be made in advanced healthcare, in contrast to the paltry returns in primary and secondary healthcare.

One of the main reasons behind our lopsided development seems to be our current tax policy which aims at collection of maximum revenue, regardless of its impact on the economy. Additionally, our Government favours revenue collection through Indirect Taxes (like GST and VAT) which are easy to collect but are a great burden on the poor who may have to pay the same tax as the richest of the rich. The public outcry on the usurious taxes levied on petrol and diesel testifies to the unbearable burden of taxation on the common man.

Unlike Indirect Taxes, Direct Taxes (like Income-tax) are progressive i.e. the richer you are the more taxes you pay. Not surprisingly, most advanced nations have Direct Taxes as their primary source of revenue. Till recently, we were also in the same league, but since the 2015-16 financial year the preponderance of Direct Taxes in the tax kitty has been reversed. It would be worthwhile to remember that at the time of liberalisation in 1991, Direct Taxes were 14 per cent of our tax collection with Indirect Taxes accounting for the balance 86 per cent.

Ten years later, the share of Direct Taxes had improved to 37 per cent. Financial year 2007-08 was the first time when Direct Tax collections exceeded Indirect Tax collections. Thereafter, the share of Direct Taxes in the tax kitty increased steadily till financial year 2014-15, when Income-tax collection was more than 56 per cent of the total tax collection. This trend was reversed in 2015-16 and from financial year 2016-17, Indirect Tax collections have exceeded Direct Tax collections, which means that the poor are now paying much more tax than the rich.

In economic terms, a high rate of Indirect Taxation has pushed up the cost of living for consumers. More importantly, it has led to increase in input cost, adversely impacting small businesses and sectors which are not under GST but who have to pay GST on their inputs. Agricultural distress has been aggravated because farmers find fertilisers, tractors and diesel getting more expensive by the day. Increase in the Minimum Sale Price has failed to mitigate the lot of famers because the Government does not purchase all the produce that comes to the market.

Second, the increase in MSP is taking place after several years during which time the input cost had gone up considerably. Much better results would be obtained by better crop advice, better rural roads and better marketing facilities. Much of the money spent on procurement of foodgrain is wasted because a large part of the grain purchased by the Government rots away, in the absence of proper storage facilities.

This money could be better utilised by giving per cropped acre subsidies at the beginning of the cropping season so that farmers can hold on to their crops till they get a proper price for their produce. Agricultural produce processing factories and proper export policies would ensure proper prices for the seasonal glut of foodgrain and vegetables.

To end agricultural distress for good, we could implement the comprehensive Swaminathan Report on Agriculture of 2006, which successive Governments have refused to implement. Initiatives like Make in India, Skill India, Doubling Farmers’ Income, Ayushman Bharat etc. are commendable in themselves but the chances of their success would increase manifold if they are woven into the policy framework. Then, the Government has to ensure that its policies remain consistent, which is not the case now. For example, the Government brought in the Insolvency and Bankruptcy Code for debt ridden companies but baulked when IL&FS started defaulting on loans totalling Rs.91,000 crore.

The same business people, who want the Government out of commercial activities, also want the Government to revive IL&FS by pumping in public funds. The merger of the comatose Dena Bank with two better performing banks (Vijaya Bank and Bank of Baroda) is another example of inconsistent policy. Suffice it to say that the merger will technically pull Dena Bank out of the ICU but no other benefit would accrue; there would be no economy of scale because no staff or other asset would be declared redundant.

In retrospect, the Rupee would not be falling today if the Government had drafted and implemented the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 in a better fashion. This Act imposed a tax of 60 per cent for regularisation of foreign assets, which were not in the knowledge or purview of the Indian Government. Total tax of about Rs.2,500 crore was collected instead of the much-hyped amount of 15 lakhs per Indian. Had the tax rate been more practical ~ say the Income-tax rate of 30 ~ we would have been awash in dollars.

Similar to the Black Money Act was the Pradhan Mantri Garib Kalyan Yojana scheme and similar was its fate. Even after the much-hyped ‘surgical strikes’ on black money, ‘exporters’ are not bringing back sales proceeds from abroad; RBI has notified the Enforcement Directorate about 91,000 ‘exporters’ who have not brought back payments for exports. For a long-term solution to the ballooning Current Account Deficit, we have to simplify export procedures which would enable even small units to export.

To recall, the principal advice of the Economic Survey of 2014-15 was that the Government should not go in for Big Bang reforms but adopt “persistent, creative and encompassing incrementalism” as the guide for prospective action. For good measure this advice was repeated at the very beginning of the Economic Survey of 2015-16, which went on to add that:

“1.2 This year’s Survey comes against the background of an unusually volatile external environment with significant risks of weaker global activity and non-trivial risks of extreme events. Fortifying the Indian economy against possible spillovers is consequently one obvious necessity. Another necessity is a recalibration of expectations.” The credo of the present Government being quantum change and soaring expectations, disruptive steps like demonetisation and uneven implementation of GST were taken, contrary to the sage advice of its own economists. We would be in a much better position if we define and follow a consistent economic policy avoiding knee-jerk reaction to minor crises.

In a nutshell, instead of off the- cuff measures, much more reflection should go into framing a rational and comprehensive policy for our economy beginning with a well framed taxation policy designed to prevent concentration of wealth and straightening out the glaring inequalities in our society. This would entail bringing back taxes on wealth, inheritance and gifts. Otherwise, there is a fair chance of our socialist republic morphing into a plutocracy. On the other hand, a more logical and friendly tax regime will work wonders for ushering in prosperity.

Long ago Chanakya had said: “Governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can survive. Taxes should be collected in small and not in large proportions”. This is the correct course to follow even today. As regards the financing of the grandiose schemes being rolled out on a daily basis, George Washington had the perfect answer: “We must consult our means rather than our wishes.”

The writer is a retired Principal Chief Commissioner of Income-Tax.