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BW Businessworld

Taxation And Justice

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The finance ministry gives a man a peculiar perspective. Now that the Prime Minister has taken it over, he must be looking at us common people through new glasses. His undistinguished predecessors have left him with a massive fiscal deficit. A Congress minister does not usually bother about such petty details. As long as India continues to grow rapidly, it will continue to pay ever more in taxes, so the debt burden is unlikely to turn our government Greek. And unlike the stupid Westerners, our government has no compunction about high rates of inflation; so if worst comes to worst, it can always print money. Still, the Prime Minister has an excellent memory. Although he has served the populist cause for four decades, the early compunctions about inflation that he imbibed from his teachers are probably still buried in a corner of his brain. They may wake themselves up and keep him awake in his role as protector of our economy.

His soul will revolt at the thought of cutting the expensive populist programmes of his government. He must be wondering which of us he can raise more taxes from, and by what trick. His predecessor was an avid listener. He would receive a string of petitioners in his vast room in the North Block in the days before the budget; they would feed him with ideas about how he could raise some taxes to hurt their competitors. He would put a few in the budget — as Pranab Mukherjee did retrospective  taxation of the Vodafone deal in his last budget. But the Prime Minister is too straight even now to be a tool of businessmen. He is likely to look for ways that are less crooked and questionable.

When he looks at income tax statistics, he will find that the share in gross domestic product of the income of taxpayers in the top bracket has been rising, and that the share of people in the bottom tax bracket has been falling. His advisers will tell him it proves that income distribution has been getting less equal. That is wrong. As incomes rise, people creep up the income chain; if income brackets are defined in terms of fixed rupees, the share of the top income bracket goes up and that of the bottom income bracket goes down even if income distribution is getting more equal.

If he wants to get a handle on income distribution, the Prime Minister should call Rama Bijapurkar. She will give him a ravishing presentation full of colourful charts. She will slice up income by quintiles and deciles. She will guide him through the thickets of National Simple Statistical Office and National Compulsively Ambivalent Economic Research. She is unlikely to prove a worsening of overall income distribution; but she may show a rise in the share of the top one or two deciles.

Even if she does not, the Prime Minister does not need statistics to tax the rich more. He can simply raise the income tax rates. He should not do what his mindless predecessor did, namely put a surcharge on income tax; in fact, he should remove it. Nor should he fiddle with tax brackets. The only way a populist can do that is by pushing up the brackets; that would reduce tax revenue. He should simply add the same figure to the tax rate in each bracket. That is like putting an additional proportional tax on all taxpayers. If he thinks that is unpopulist, he should simultaneously raise the minimum tax limit and all tax brackets.

These are all ideas tailored to his populist soul. But if he is prepared to break a little out of his political straitjacket, he can revive an idea I had put forward when I was in the finance ministry. It was to call the chiefs of the two revenue departments for direct and indirect taxes, and to ask them for a copy of all the rules that they have made over the decades. There are thousands, and the departments will say that it is impossible to list them. But if it is possible to apply them, it should be possible to list them. Then he should go through the list, and abolish 99 per cent of rules which were made only to favour or punish someone. We never got this done because the interested people got rid of me before I could get anywhere. If he gets it done now, his income tax and excise revenue will go up by at least 50 per cent; he will be able to bring down the tax rates and still raise revenue. That is, if he wants to repair and restore the economy. He need not do it if he only wants to continue as Prime Minister. There is always a chance that if he stays longer in power, he may be able to do more good. There are higher priorities than the interest of the country.

The author is Consultant Editor of Businessworld.

ashok(dot)desai(at)gmail(dot)com

(This story was published in Businessworld Issue Dated 23-07-2012)