By Arunabha Bagchi
As I got to know “local” Americans after settling in the United States, I noticed to my surprise that they never showed any excessive pride for being Americans. What they always bragged about was that they were “taxpayers”. They stressed that their tax money paid all government employees their salaries. Getting service from those public servants was, therefore, a matter of right for them. This was a completely new way of looking at things for someone from India. I realised that paying income tax gives someone a feeling of participation in society and a sense of empowerment. I later found out that about 45 per cent of all Americans pay income tax. The percentage is roughly similar in all Western countries.
By contrast, according to our erstwhile finance minister P Chidambaram, less than 3 per cent of our countrymen filed income tax returns last year. Of course, many Indians earn too little to qualify to pay income tax, but the major reason is the constant upgrading of exemption limits and income brackets. This is why the percentage of Indian tax payers stagnates at this absurdly low level. Despite a substantial increase in incomes of people in provincial towns with the growth of powerful regional political parties, and filtering of considerable investment to the countryside, there is no visible attempt to tap their incomes for tax purposes.
The Indian media are full of blogs on economic matters every day, but the bloggers seem to have adopted a collective maunobrata (vow of silence) as far as income tax is concerned. The only time we read about income tax is during the budget speech every year when the finance minster ritualistically increases the exemption limit for paying the tax. There is no justification given for the increase, and it is obviously a sop for cheap popularity. But no one takes a critical look at this gimmick, possibly for fear of bringing the income tax debate into the open. This year was no exception. Although our current Finance Minister did not increase the exemption limit directly in the latest budget proposal, he indirectly jacked it up considerably by providing many tax deductible possibilities to please the upper middle class voters.
Winston Churchill showed his contempt of the ability of Indians to govern themselves by declaring that the rulers of an independent India would even tax the air one breathes there. It is as if to prove Churchill wrong that our rules ended up collecting the least amount of tax as percentage of the GDP among all large economies of the world. The most astounding fact in India is that agricultural income, despite huge increase in income of many farmers after the “green revolution”, is not taxed at all. Sometimes it appears that there is a conspiracy among our elites to keep the percentage of taxpayers very low to deny ordinary Indians a sense of permanent empowerment and of participation in the affairs of their country. The fact that these hapless common folk exercise their voting rights once in a while is bad enough!
Comparison with China is appropriate at this point. In an interesting study published five years back, Thomas Piketty and Nancy Qian came up with the startling conclusion, “The combination of fast economic growth and under-indexed tax schedule in China implies that Chinese income tax revenues grow very fast as a fraction of GDP, while the constant adaption of exemption levels and income brackets in India prevents the income tax from playing such a powerful role. According to our estimates, the fraction of the population in China subject to the income tax has increased from less than 0.1 per cent in 1986 to about 20 per cent by 2008, while it has stagnated at around 2 per cent-3 per cent in India.”
The first author is the same Thomas Piketty who has now achieved cult status with the publication of his encyclopedic treatise last year, entitled Capital in the Twenty-First Century. His analysis of the dramatic rise in the wealth gap everywhere during the last three decades and his “dangerous” suggestion of introducing a “wealth tax” are hugely debated in advanced countries at present. By contrast, we have just abolished the paltry wealth tax in the latest budget, replacing it with 2 per cent surcharge instead.
No one likes paying income tax. Even the wealthy among the socially conscious Calvinists/Lutherans of Northern Europe use all possible tax loopholes to reduce their tax burdens. Outright cheating is, however, more widespread in Southern Europe. Their outrageous ways of avoiding income tax became public knowledge during the credit crisis, and is considered a key reason for difficulties facing these countries in getting out of this chaos. India is, however, a case apart. The more property you have and the richer you become the less and less tax you pay, because you can take things like dividend income from shares and property away from taxable income. We do not have any inheritance tax! The highest slab for income tax of 34.61 per cent (including surcharge) is abysmally low by international standards, particularly when we boast of having more billionaires than Germany. Our wealthy use existing tax laws to pay hardly any income tax by international standards. This is in addition to massive cheating of much larger scale than in Southern Europe. Why does this not cause an outrage in our country? I believe it is because only a tiny group of salaried people pay income taxes in India, and others do not feel empowered to demand fairer share of taxes from their rich countrymen. This is why the movement of Anna Hazare against black money, largely amassed by cheating on income tax, attracted the attention of only the tax paying urban middle class in India.
Ever since our economic liberalisation in the early Nineties, our government was steadily reducing its role in education and healthcare under the pretext of balancing the budget, making room for the private players to make huge profits in the bargain. The vast majority of our countrymen could not protest, as they did not contribute directly to the government finances. Those who paid taxes, on the other hand, earned enough to finance costs of education and healthcare from their own pockets. No one objected either when the government steadily increased exemption of taxes paid by our businesses. The only way out of this passivity of the vast majority of our countrymen is to bring as many of them within the income tax bracket as possible.
How could this be achieved? It is preposterous for a layman like me to give any serious suggestion. Here are some off-the-cuff naïve ideas. The first obvious step is to follow China by under indexing the tax schedule. Next, serious efforts must be made to bring all (wage and non-wage) incomes throughout the country into the tax system. A paltry 10 per cent of the workers fall within the organised sector. Bringing more employees into the formal sector is one obvious step in this direction. Here is the real challenge. Our business gurus know everything we need to do to become an advanced economy. The only thing they are apparently clueless about is how to devise a mechanism to tax all (wage and non-wage) incomes as in the advanced economies.
The amount of taxation for low/middle income people must be a token one. But this will give them a real sense of rights. This is different from rights given to them as gifts by governments, often as gimmicks for getting votes. Is it not possible for us to use our much-hyped “digital connectivity” of provincial towns and villages for this purpose?
