"It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold" – Kalidas in Raghuvansh eulogizing King Dalip. Its a given that one can’t escape taxes, even on the death bed. Brian Fernandes, a passionate author on a variety of issues, in this article, examines whether there is an equally effective alternative to the present method of levying income tax..
A mere 37 million Indians pay Income tax. That’s approx 3 percent of the Indian population. 90 percent of these are middle class salaried people, trying to make ends meet. About 42,800 people have declared taxable income of over Rs. 1 crore annually. Indeed, 400,000 people (with incomes more than Rs. 20 lakh, and constituting 1 per cent of the tax-base) account for 63 per cent of the income taxes collected from individuals.
It’s obvious then, that 99 per cent of India's taxpayers pay a small sum as taxes or not at all on the basis of some exemption or the other, but these are the very people, middle class people, doing an honest days’ work, who are harassed into filing their tax-returns.
A mere 37 million Indians pay Income tax. That’s approx 3 percent of the Indian population. 90 percent of these are middle class salaried people, trying to make ends meet. About 42,800 people have declared taxable income of over Rs. 1 crore annually. Indeed, 400,000 people (with incomes more than Rs. 20 lakh, and constituting 1 per cent of the tax-base) account for 63 per cent of the income taxes collected from individuals.
It’s obvious then, that 99 per cent of India's taxpayers pay a small sum as taxes or not at all on the basis of some exemption or the other, but these are the very people, middle class people, doing an honest days’ work, who are harassed into filing their tax-returns.
Poor returns on tax paid
In addition to the almost 30% of their income they remit in income tax, this middle class backbone of India, is taxed an additional 30% in indirect taxes on the goods and services they buy. These indirect taxes range from customs and excise by the centre to VAT and luxury tax at the state level and octroi and entry tax at the municipal level – The list is long and uneven. In addition there are local taxes like property, road and other utility taxes. In the end, an income tax payee ends up paying almost 60% of his income in taxes. In return, unlile in western countries, where too the tax rates are high, he gets poor governance, poor public services, an insensitive bureaucracy, and absolutely minimal social welfare support (Health and old age support) unless he is a Below the poverty level card holder, and then too he is made to run from pillar to post by an indifferent bureaucracy to get what is rightfully his! All this, notwithstanding the expenditure incurred on fees of Chartered Accountants for filing income tax returns.
The Centre’s receipts from individual income tax in the last fiscal are estimated at 2.78 lakh Crores (RE 2014-15) and the estimates for the current fiscal have been hiked to 3.37 crores, without any apparent expansion in the base, which needs economic growth to make it happen. These hikes will happen year on year, and individuals will be squeezed beyond their limits, as Governments spend beyond their means on things and people that they should be conservative about in a government of the people, by the people and for the people – maximizing govt. through a self perpetuating bureaucracy – (the tax bureaucracy is a reminiscent of the British raj) and a political system based on first past the post system - and minimizing governance – where decisions are taken for the benefit of governments themselves (like elected representatives doubling their salaries and increasing their perks) and not for the people they represent.
Harrassment
The government’s appetite for money increases on a stagnant tax base, can only translate into more emphasis on compliance which results in intentional or unintentional harassment, of the middle class tax payer. There is an army in the background, ready for this challenge, each of them trying to climb the Income Tax’s department’s steep ladder, which when translated from bureaucratese, implies more harassment of the honest tax payer – the latest example of which, is a fourteen page IT return form!.
Govt.’s opaque return on investment
The return on investment is a principle that is followed in all business enterprises – however this is not true of government expenditure especially in the tax collection regime - While budget figures are readily available on the amount of income tax accruing to the government, there is little information to be found on the expenditure incurred – salaries, perks, office expenses, travel expenses and the like – to secure the meager income tax that they generate. My assessment, based on incomplete information would be that it is disproportionate. Indeed if one visits the Income Tax department’s website, in the page on history of income tax, (http://www.incometaxindia.gov.in/Pages/about-us/history-of-direct-taxation.aspx), one will get a clear picture of how and why they expanded and the picture it paints can only give a clear indication of the what the future holds for an honest tax payer, as their tribe remains stable and government demands increase. There is also the accountant’s and lawyer’s lobby that seeks to complicate laws to ensure, that their not inconsiderable income is not affected. Perhaps this is an uncharitable view, but one that has the ring of truth to it.
The income tax conundrum and its solution
The problem with individual income tax as it stands today, is its small base, complex exemption calculations and limited scope for increases, given the political economic environment in which it sustains itself. It needs to be replaced with more transparent system that provides no exemptions, increases the base, makes it equitable and easy to administer, both for the individual tax payer and the government. So what should be done? The answer – abolish income tax altogether and replace it with an expenditure tax – its equitable, nobody can escape it, it widens the base at one stroke, it’s easy to administer and primarily it works on the premise, that one spends in proportion to his income.
The idea is not new. The direct taxation of personal expenditures for consumption is one of the oldest has been in circulation sing the 17th century. Many economists have argued that it is the "ideal" form of taxation. The only "perfectly unexceptionable and just principle of income tax", John Stuart Mill contended, is to "exempt all savings". Because savings are excluded from the tax base, its supporters claim that it encourages thrift, which in turn should stimulate investment. Among the most influential work on this theme is by Kaldor who developed the idea of an "expenditure tax" (1955) as a substitute for income tax.
Nicholas Kaldor, in his book 'Expenditure Tax' (1955), argued that the individual's taxable capacity as his "spending power" which includes all the various forms of economic wealth (stocks of wealth as well as recurrent and irregular flows of money) which must be reduced to a common denominator of so much per annum for tax purposes. Also, allowance should be made for differences in individual needs which make some persons more or less able to pay than others with the same spending power. Kaldor was of the opinion that the rates of an expenditure tax can be made steeply progressive in order to tax the rich heavily and institutionalize equity.
In addition to the almost 30% of their income they remit in income tax, this middle class backbone of India, is taxed an additional 30% in indirect taxes on the goods and services they buy. These indirect taxes range from customs and excise by the centre to VAT and luxury tax at the state level and octroi and entry tax at the municipal level – The list is long and uneven. In addition there are local taxes like property, road and other utility taxes. In the end, an income tax payee ends up paying almost 60% of his income in taxes. In return, unlile in western countries, where too the tax rates are high, he gets poor governance, poor public services, an insensitive bureaucracy, and absolutely minimal social welfare support (Health and old age support) unless he is a Below the poverty level card holder, and then too he is made to run from pillar to post by an indifferent bureaucracy to get what is rightfully his! All this, notwithstanding the expenditure incurred on fees of Chartered Accountants for filing income tax returns.
The Centre’s receipts from individual income tax in the last fiscal are estimated at 2.78 lakh Crores (RE 2014-15) and the estimates for the current fiscal have been hiked to 3.37 crores, without any apparent expansion in the base, which needs economic growth to make it happen. These hikes will happen year on year, and individuals will be squeezed beyond their limits, as Governments spend beyond their means on things and people that they should be conservative about in a government of the people, by the people and for the people – maximizing govt. through a self perpetuating bureaucracy – (the tax bureaucracy is a reminiscent of the British raj) and a political system based on first past the post system - and minimizing governance – where decisions are taken for the benefit of governments themselves (like elected representatives doubling their salaries and increasing their perks) and not for the people they represent.
Harrassment
The government’s appetite for money increases on a stagnant tax base, can only translate into more emphasis on compliance which results in intentional or unintentional harassment, of the middle class tax payer. There is an army in the background, ready for this challenge, each of them trying to climb the Income Tax’s department’s steep ladder, which when translated from bureaucratese, implies more harassment of the honest tax payer – the latest example of which, is a fourteen page IT return form!.
Govt.’s opaque return on investment
The return on investment is a principle that is followed in all business enterprises – however this is not true of government expenditure especially in the tax collection regime - While budget figures are readily available on the amount of income tax accruing to the government, there is little information to be found on the expenditure incurred – salaries, perks, office expenses, travel expenses and the like – to secure the meager income tax that they generate. My assessment, based on incomplete information would be that it is disproportionate. Indeed if one visits the Income Tax department’s website, in the page on history of income tax, (http://www.incometaxindia.gov.in/Pages/about-us/history-of-direct-taxation.aspx), one will get a clear picture of how and why they expanded and the picture it paints can only give a clear indication of the what the future holds for an honest tax payer, as their tribe remains stable and government demands increase. There is also the accountant’s and lawyer’s lobby that seeks to complicate laws to ensure, that their not inconsiderable income is not affected. Perhaps this is an uncharitable view, but one that has the ring of truth to it.
The income tax conundrum and its solution
The problem with individual income tax as it stands today, is its small base, complex exemption calculations and limited scope for increases, given the political economic environment in which it sustains itself. It needs to be replaced with more transparent system that provides no exemptions, increases the base, makes it equitable and easy to administer, both for the individual tax payer and the government. So what should be done? The answer – abolish income tax altogether and replace it with an expenditure tax – its equitable, nobody can escape it, it widens the base at one stroke, it’s easy to administer and primarily it works on the premise, that one spends in proportion to his income.
The idea is not new. The direct taxation of personal expenditures for consumption is one of the oldest has been in circulation sing the 17th century. Many economists have argued that it is the "ideal" form of taxation. The only "perfectly unexceptionable and just principle of income tax", John Stuart Mill contended, is to "exempt all savings". Because savings are excluded from the tax base, its supporters claim that it encourages thrift, which in turn should stimulate investment. Among the most influential work on this theme is by Kaldor who developed the idea of an "expenditure tax" (1955) as a substitute for income tax.
Nicholas Kaldor, in his book 'Expenditure Tax' (1955), argued that the individual's taxable capacity as his "spending power" which includes all the various forms of economic wealth (stocks of wealth as well as recurrent and irregular flows of money) which must be reduced to a common denominator of so much per annum for tax purposes. Also, allowance should be made for differences in individual needs which make some persons more or less able to pay than others with the same spending power. Kaldor was of the opinion that the rates of an expenditure tax can be made steeply progressive in order to tax the rich heavily and institutionalize equity.
The consumption tax, sometimes referred to as a 'spending tax' or 'expenditure tax', is quite like the income tax, with one key difference being that the tax base is expenditure, not income.
Two issues remain though, the huge quantum of cash transactions in the economy especially in contract work, the real estate sector and the betting sector, which the SIT on Black money estimated to be in the range of Rs: 30000 crores and the issue of a differential corporation income tax as two rates for a single product or service would be hugely difficult to administer.
Can India really do away with income tax?
The above facts present a strong case for doing away with individual income tax. Why should only a particular class be forced to pay taxes? On this ground alone, it would render great political mileage to the political parties supporting/proposing such a change. Poll analysts say that the middle class voted for the BJP in huge nos. and they are the ones who will be thrilled to hear that the government is considering such a move. They would be enchanted with an initiative that reduces their net tax liabilities from existing 60% to 40% overall and eliminates the chances of governmental harassment on some pretext or the other.
How can it be done?
The gross central tax estimated receipts for this fiscal are to the tune of 14.5 lakh crore including the state’s share of approx 5 lakh crore, leaving 9 lakh crore for the centre. The share of direct taxes in this pool is 8 lakh crores (both corporation(4.7 lakh crore) and Individual (3.3 Lakh crore)) and the balance 6.5 lakh crores is to come from direct taxes. What needs to be made up is the share of individual taxes in this scheme, viz around 3 lakh crores. On January 2, last year, 4 months before the general election, Pune-based anti-tax group Arthakranti made a presentation to senior BJP leaders, including Rajnath Singh, LK Advani, Sushma Swaraj, Arun Jaitley, former finance minister Yashwant Sinha and Nitin Gadkari, on simplifying taxation by a flat Banking Transaction Tax (BTT), which was based on the principle of expenditure tax. The biggest criticism of the BTT is that a large fraction of consumption expenditure in India is still cash (83 per cent some estimates in 2011). This is a fair criticism and needs to be addressed.
The answer to this conundrum presents itself in the Goods and Services Tax Bill, currently logjammed in parliament. GST is a destination based indirect tax that will be levied on the manufacture, sale and consumption of goods and services that subsume all central and state indirect taxes and levies and here lies the opportunity. The centre can easily add on to the GST in the form of a cess or a direct overhead percentage on the goods and services rendered after classifying them into four categories – Basic, essential, fair, and luxury, with basic being exempt from the taxes.
The empowered committee of finance ministers, has recommended a base rate of around 26% for the GST to neutralize loss of revenue from indirect taxes of 22 lakh crores (17 from the states and around 5.5 lakhs crores of the centre) The finance minister has indicated a base rate of around 23% might be feasible initially. Income tax can be add on tax in the range of 0, 3, 5 and 7% for each of the above categories of goods and services, to land up with a max GST rate of between 30 and 35%.
As regards Corporation Tax, the centre needs to mop up approx 4.7 lakh crores, and differential rates of taxation for corporations, or exempting them as they already pay corporation tax would be a difficult and almost impossible proposition. I would recommend that corporation tax be retained at the lowest possible level viz. 10% flat, and the add on’s be applicable at the same rates across the board. This would in turn help the government, as company expenditure / purchases whether of raw material or other supplies is easily trackable. While I’ve presented a conceptual framework, that seems workable and useful all around the devil is in the detail, and it is for the economists and the experts to take it further.
This system will be easier to administer as the GST tax system will already be in place and this will only be an add on tax. It is better than the BTT in that the tax base will be wider, and compliance, at least in the organized sector, almost 100%,. It is both equitable and transparent and most of all will eliminate the need for a tax army dedicated to the collection of income tax. It will in addition promote savings which can lead to investment and economic growth.
It’s an idea whose time has come, and I urge the government to give it a try.
Two issues remain though, the huge quantum of cash transactions in the economy especially in contract work, the real estate sector and the betting sector, which the SIT on Black money estimated to be in the range of Rs: 30000 crores and the issue of a differential corporation income tax as two rates for a single product or service would be hugely difficult to administer.
Can India really do away with income tax?
The above facts present a strong case for doing away with individual income tax. Why should only a particular class be forced to pay taxes? On this ground alone, it would render great political mileage to the political parties supporting/proposing such a change. Poll analysts say that the middle class voted for the BJP in huge nos. and they are the ones who will be thrilled to hear that the government is considering such a move. They would be enchanted with an initiative that reduces their net tax liabilities from existing 60% to 40% overall and eliminates the chances of governmental harassment on some pretext or the other.
How can it be done?
The gross central tax estimated receipts for this fiscal are to the tune of 14.5 lakh crore including the state’s share of approx 5 lakh crore, leaving 9 lakh crore for the centre. The share of direct taxes in this pool is 8 lakh crores (both corporation(4.7 lakh crore) and Individual (3.3 Lakh crore)) and the balance 6.5 lakh crores is to come from direct taxes. What needs to be made up is the share of individual taxes in this scheme, viz around 3 lakh crores. On January 2, last year, 4 months before the general election, Pune-based anti-tax group Arthakranti made a presentation to senior BJP leaders, including Rajnath Singh, LK Advani, Sushma Swaraj, Arun Jaitley, former finance minister Yashwant Sinha and Nitin Gadkari, on simplifying taxation by a flat Banking Transaction Tax (BTT), which was based on the principle of expenditure tax. The biggest criticism of the BTT is that a large fraction of consumption expenditure in India is still cash (83 per cent some estimates in 2011). This is a fair criticism and needs to be addressed.
The answer to this conundrum presents itself in the Goods and Services Tax Bill, currently logjammed in parliament. GST is a destination based indirect tax that will be levied on the manufacture, sale and consumption of goods and services that subsume all central and state indirect taxes and levies and here lies the opportunity. The centre can easily add on to the GST in the form of a cess or a direct overhead percentage on the goods and services rendered after classifying them into four categories – Basic, essential, fair, and luxury, with basic being exempt from the taxes.
The empowered committee of finance ministers, has recommended a base rate of around 26% for the GST to neutralize loss of revenue from indirect taxes of 22 lakh crores (17 from the states and around 5.5 lakhs crores of the centre) The finance minister has indicated a base rate of around 23% might be feasible initially. Income tax can be add on tax in the range of 0, 3, 5 and 7% for each of the above categories of goods and services, to land up with a max GST rate of between 30 and 35%.
As regards Corporation Tax, the centre needs to mop up approx 4.7 lakh crores, and differential rates of taxation for corporations, or exempting them as they already pay corporation tax would be a difficult and almost impossible proposition. I would recommend that corporation tax be retained at the lowest possible level viz. 10% flat, and the add on’s be applicable at the same rates across the board. This would in turn help the government, as company expenditure / purchases whether of raw material or other supplies is easily trackable. While I’ve presented a conceptual framework, that seems workable and useful all around the devil is in the detail, and it is for the economists and the experts to take it further.
This system will be easier to administer as the GST tax system will already be in place and this will only be an add on tax. It is better than the BTT in that the tax base will be wider, and compliance, at least in the organized sector, almost 100%,. It is both equitable and transparent and most of all will eliminate the need for a tax army dedicated to the collection of income tax. It will in addition promote savings which can lead to investment and economic growth.
It’s an idea whose time has come, and I urge the government to give it a try.
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