By M D Nalapat
Had
Gujarati wisdom been fully applied and tax rates brought down
substantially, both revenue collection and the number of taxpayers would
have risen.
The
governance system in India remains locked inside a time warp keeping
its responses anchored to the period when the Union Jack flew over what
is now Rashtrapati Bhavan. However, increasingly the people of this
country have willy-nilly acquired the skill-sets needed to adapt to a
world pervaded by Artificial Intelligence (AI) and Artificial General
Intelligence (AGI). Such a world may mean that only around 20% of the
population will be directly involved in managing AGI and AI-assisted
systems, while much of the rest of the population provide services and
commodities to the (AGI and AI-directing) fifth of the population. We
are already seeing such a transformation from goods to services in some
of the better shopping malls in the metro centres, where outlets selling
commodities are steadily getting replaced by movie theatres, health
spas, children’s play areas, games arenas, food outlets and video play
consoles. Such an economic system requires those earning higher incomes
to spend a goodly proportion of such takings, so that others share in
their wealth. An example is the wedding industry in India, which
involves millions of individuals serving up music, entertainment,
temporary facilities and much else to the families of the bride and
groom. Given the reality of officials having relatively low income
levels (as compared with the commercial sector) going together with high
dollops of power and discretion (especially those belonging to the IAS,
the IPS, the IRS and other elite administrative cadres) in post-1947
India, to expect governmental corruption to get eliminated is
unrealistic. Since 2004, the smaller than needed doses of economic
reform that were carried out since Narasimha Rao have been reversed,
such that massive boosts in administrative discretion and intrusion took
place while Manmohan Singh was legally in charge of the Central
government. Sardar Vallabhbhai Patel believed that practically every
individual in the civil service had integrity and a desire to improve
the lives of the citizenry in general, so that it was safe to transfer
huge tranches of discretionary and disciplinary authority to them. This
assumption and practice has continued since the Sardar’s time, including
by Prime Minister Narendra Modi.
Income-tax officers, for example, have
been given freedom and powers on a scale unprecedented in post-1947
India, and they have, therefore, been busy sending tax notices and
raiding several times more individuals that was the case under Finance
Minister Jaswant Singh. However, such exertions have resulted only in a
moderate rise in the number of registered taxpayers, from 3.65 crore to
4.07 crore, with actual income-tax contributors this year remaining at
around 2 crore. Had Gujarati wisdom been fully applied and effective tax
rates brought down substantially, both revenue collection as well as
the number of taxpayers would have risen by several times more than is
the case now. Empirical evidence shows that reductions in tax rates have
invariably led to more than proportionate increases in both taxpayer
base as well as collections. Narendra Modi has been celebrated across
the globe as a maestro of economic administration. He needs to take
authority back from his officials to ensure that the 2018-19 Union
Budget breaks away from those witnessed since 2004 by lowering effective
tax rates substantially.
The Union Government has launched a “War
on Cash” since coming to office, so that such transactions in key
economic job creating sectors appear to have been substantially reduced.
However, the structure and mechanics of administration still result in
substantial amounts of undeclared cash. For example, since high GST
rates were fixed on several items, more service outlets than before are
offering customers the choice of paying in cash, thereby getting a price
reduced by the quantum of GST that would otherwise have been levied. At
the same time, those establishments that honestly declare their incomes
and require the same from their customers are witnessing a fall in
business. Many High Net Worth individuals are now celebrating the
marriage of family members in locations such as Rome or Bangkok, away
from the radar of the tax authorities. Increasing amounts of cash have
been moving illegally outside rather than getting invested or otherwise
spent in India. North Block’s obsessive search for every rupee of
available revenue is having the effect of dampening spending. Not
declaring taxable income is of course wrong, both legally and ethically.
However, it would be unrealistic to expect either this evil to vanish
in a short period or to believe that the official machinery is such as
to reduce leakages to low levels. Had that been the case, around Rs
550,000 crore of the 86% of currency made illegal on 8 November 2016
would not have dared to return to the banking system, whereas in
practice almost all the banned currency returned for conversion.
The forthcoming Union Budget needs to be
finalised with Gujarati practicality, and must ensure a red carpet to
investment and consumer activity, on the correct premise that a higher
velocity of circulation of money will ensure that some tax gets paid
somewhere and somehow in a way impossible if much of potential spending
were driven overseas or extinguished through police methods. A
“Gujarati” budget would cut taxes and make compliance simple, thereby
ensuring that a climate of optimism and growth replaces the present
atmosphere of dread of official excess. The 2018-19 Union Budget will
shape the remainder of Prime Minister Modi’s term in office and must
bear witness to the Prime Minister’s innate pragmatism and pro-growth
instincts.
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