I reflect upon one of Winston Churchill’s speeches at a Conservatives’ conclave at Manchester back in 1904. And he says: “…I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” I think nothing could be truer! A syndrome we still suffer from, here in India, in spite of the measures taken ever since the days of our economic liberalisation in 1991.
So, it is highly positive, in my view, of the government to form last week a taskforce to come out with recommendations on a new tax code targeted to: a) widen the tax base; b) improve compliance; and c) afford ease of doing business. I am looking also for: i) global in its design; and ii) stability in rates say, over a five-year period so that planning of projects and structuring of ownership can be made more meaningful.
Now, before I come to my takes on the taskforce I thought it best to set the context first.
Canons of taxation
It is fundamental to any good tax regime to comply with the following four canons of taxation of Adam Smith: a) equality b) certainty c) economy and d) convenience. Our new tax regime needs generous doses of all four, even after the 56 years of the current one.
We do not seem to be satisfying the “equality” clause well because our indirect taxes are far higher in proportion of what ideally it should be; for example our direct to gross indirect tax ratio is only 30 per cent compared to 67 per cent of the OECD and 55 per cent of the BRICS. This means inequality – the rich and the poor pay the same tax to a much larger extent. In terms of economy, 1 per cent of our population holds 60 per cent of our wealth (and it’s on the increase!), and our tax-to-GDP ratio is only around 12 per cent against the 34 per cent of the OECD and 27 per cent of the BRICS. Just consider this: 20 per cent of our GDP is outside the direct tax net and another 20 per cent qualify for exemptions, that leaves 60 per cent – and with an average tax incidence of 30 per cent, direct taxes should actually be around 18 per cent of GDP. Well, it is actually a meager 6 per cent!
Therefore we need graded improvements in each sphere – and that is what I look forward to from the taskforce and the new direct tax code.
I think, first the tax regime has to be insulated from politics and lobbyists. As a precursor for putting in an honest and effective code, first an independent fiscal council has to be in place with representatives from government and industry, far away from reaches of politics and powerful lobbies, much in line with what happens in the rest of the developed world. In this, I must say, I am squarely disappointed with the government’s orders to shelve the recommendations of the N K Singh committee on fiscal consolidation, conveniently out of the way for the next and last budget of this government.
You can’t scrape the surface saying ‘we brought these and those reforms’. Through that we may improve our ratings, never our economy! Remember, we are still at an abysmal per-capita income (142nd position among 187 countries), a high corruption index (76th of 176 countries), a highly adverse world happiness index (122th of 155 countries), and we stand at 97th position among 117 countries on the global hunger index. These are the agenda of the day, I think, in every structure that is conceived on any serious subject.
Tax on farming
Our tax regime therefore has to bring under its ambit agriculture, that is 15 per cent of our activities. There is hardly an apolitical reason to allow it free. Amend the Constitution and place agriculture on tax – yes with the revenue – afford better irrigation, warehousing and logistics, plant protective and plant nutrients and increase yields!
Secondly, huge rich trusts perennially get away from taxes. My take here is: do away with all exemptions of trusts and also do away with the so-called mandatory CSR contributions. These schemes invariably foster opacity in round routing of money back and forth. Third, do away with exemptions on contributions to political parties as also income of political parties – tax each rupee of these multibillionaire behemoths! Fourthly, tax capital gains as normal income. With reduced rates that’s perfect logic! Fifthly, scrap the ‘Hindu undivided family’ as an entity. I am sorry, but we have grown up in an ambience which sees tax structuring as a seeming tool for incentivising charity and priorities or for fulfilling arbitrary and illogical electoral promises! But why should it be so? A tax structure, according to the canons, is meant to generate revenues in a way which is “equitable, economically sound, certain of accrual and convenient to administer” – that’s it!
Sixthly, on this same logic again, why should there be a tax on private sector employees’ pensions, that accrue out of annuities from post-tax savings. It clearly violates the canon of equality in my view!
Lastly, with lessening of exemptions and thresholds, the tax base would increase exponentially at the bottom of the income pyramids and then rates can be drastically reduced. Only then can we say we comply with Smith’s classic canons of taxation.
My last point is on ease of payment of taxes: the canons, Smith referred to as “convenience” and “certainty”. The recent World Bank’s ‘ease of doing business’ rankings say that we stand at 119th position among 190 countries on ‘ease in paying taxes’! Cut harassments in the process, abhor retrospective amendments which seem to denigrate the system itself – these do not portend well of our tax policies, internationally, I am afraid.
With a positive direct tax code in place, GST tariffs should be reduced to maybe a single, lower (normal) rate and one higher rate for sin goods, that’s all. That, I think is the roadmap for ‘equality’. Let’s not ‘try and lift the bucket by its handles whilst standing inside it’!