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Saturday, 28 January 2017

Low tax rates mean higher collections (Sunday Guardian)

By M D Nalapat

Tax slabs should begin at Rs 6 lakh a year; income up to Rs 50 lakh should have 10% tax.
 
The 8 November 2016 demonetisation of 86% of India’s currency is a measure not duplicated before on the same scale in any democratic state. This has given rise to expectations that the 2016-17 Union Budget will be similarly path-breaking, in that it will slash tax rates and simplify regulations so that hundreds of crores of rupees of the monthly takings of lawyers and chartered accountants remain in the pockets of other taxpayers. What needs to be considered is the fact that demonetisation was strongly supported by key elements of the bureaucracy, including the Reserve Bank of India, the Ministry of Finance and agencies tasked with battling terrorism. Given that our official machinery is the natural-born successor to the British raj, and indeed has the same DNA as its parent, the demonetisation was almost unanimously backed because of its ripping away the veil of secrecy from financial transactions. Whether an individual bought alcohol or indulged himself in other ways, payment by card meant not only a tithe to the exchequer (and to the companies owning such alternatives to cash) but transparency in what each citizen was doing. Of course, our bureaucracy resists revealing the inner processes of its own working, something unexplainable if the assumption be made that all executive actions are driven by public interest. Even Prime Minister Narendra Modi seems to be finding it a steep uphill climb to actualise his 2014 promise of transparency, with even the Subhas Bose papers remaining largely hidden together with such relics as the Henderson-Brooks report. The Right to Information committees remain the preserve of those with a record of thirty years and more of denying information to any individual outside the bureaucracy and its relatively few political overlords, while even the courts often trust the bureaucracy’s word that enhanced transparency would—horror of horrors—only work to fulfil the objectives of the ISI and other foes of India. In fact, the more transparency there is, the cleaner and more efficiently will government function, thereby leading to the double digit growth that is essential if India is to avoid the fate of Pakistan in the coming years.
For the British, all that mattered was to squeeze out revenue from the people of India so as to feed the gargantuan colonial machine. That approach does not seem to have changed over the past seven decades. Almost all budgets have been almost wholly designed to meet the expanding costs of governance during the year in question, rather than to boost growth so that future tax revenues would go up. An example of such regression is that Chidambaram innovation, the Service Tax, which has ensured that a once fast-growing sector has since slowed down considerably. Had this tax been abolished or sharply reduced, the services sector would by now have expanded its employment and income creating capacities sufficient to more than compensate (through indirect and other taxes) for the revenue loss experienced in abolishing or sharply reducing the Service Tax. Instead, this impost has steadily been increased, and looks to be in the future as well, thereby slowing down job creation further in an economy already burdened by high imposts and vexatious regulation. It does not seem to bother North Block that, for example, the reason why companies with substantial businesses in India declare more profits (and therefore pay more taxes) in foreign countries rather than in India (through juggling of accounts) is because each rupee of declared profit gets taxed much higher in this country than in most other corners of the globe.
Hopefully, the boldness shown by Narendra Modi in the demonetisation exercise will get repeated in the next Union Budget. Tax slabs should begin only at Rs 6 lakh a year, and there should be just  a 10% tax on income up to Rs 50 lakh annually, rising to a 20% rate on income up to Rs 5 crore a year, and 30% on income above that figure. In order to ensure that wealth does not remain skewed in coming years, an inheritance tax of 10% should be levied up to for any inheritance above Rs 10crore, with this rising to 20% from Rs 10 crore to Rs 25 crore, and 30% for all assets above that value. As for Wealth Tax, this should be levied only on wealth above Rs 10 crore and should be in the form of contributions to listed NGOs active in societal uplift. In other words, Wealth Tax should fall on the truly well-off to institute a scheme of Individual Social Responsibility (ISR) on the lines of CSR. A moderate overall tax regime that promotes both a social conscience as well as greater equality over time would ensure a far better climate for growth than the convoluted and high tax regime that the country has been witness to for much too long.
Populists who indulge in Maoist rhetoric directed against the rich need to understand that most of the rich as well as the bulk of the poor are the consequence of a colonial governance system that rewards dishonesty and penalises the honest. Those carrying out a populist campaign against the wealthy will only ensure such a dampening of the investment climate that the annual growth rate will return to the 3% level that was the norm during the Fabian Socialist decades of “Amiron ko Hatao”. All that such measures did was to reduce growth and increase the number of those remaining in poverty. Rather, what is needed is to ensure a post-colonial governance system, where the deserving of any income group are given the educational and other tools needed to grow the country by growing themselves in a facilitatory environment. The millions of citizens who have backed Narendra Modi long before he took charge on 26 May 2014 expect the PM to ensure that the low taxes, low regulation and high transparency inherent in his historic call for “Minimum Government” become a reality at least before the next Lok Sabha elections, if not in 2017 itself.

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