Taxpayers need to be respected. They need to feel like builders of a new India, not criminals or naïve. The government needs to think about giving taxpayers their due.
It hurts. When the government looks at the hand that feeds it with a sweeping suspicion that all taxpayers are really tax evaders, it hurts. When the government gives sweeping powers to tax officials, without any penalty for wrongdoing, neither because of incompetence nor corruption, it hurts. When the government gives revenue collection “targets” to officials and their neutrality gets compromised and their incentives get warped to squeeze more, it hurts. When the official calls a taxpayer and makes him wait for hours like a petty criminal, it hurts. When, despite the taxpayer answering all questions, the official says he will still need to extract some more tax and the taxpayer is forced to shell it out in fear of inconvenience or worse, it hurts. When the entire burden of government’s targets falls on just 35 million taxpayers, or less than 3 per cent of the population, with the rest (including extremely wealthy farmers) invisible to the tax system because of petty politics across the ideological spectrum, it hurts.
And yet, every year, as the Union Budget gets closer, these become non-issues. The only thread linking us taxpayers with the government is whether the Budget has put more money in our hands, raised exemptions, increased deductions, lowered the rate of tax. As if a fiscal intercourse is all there is to the matter, where Finance Ministers get their 24 to 36 hours of grandstanding, with the industry always cheering, the Opposition always critiquing, the markets always unpredictable. And we taxpayers watch the drama, benumbed by the comfort the statistically-insignificant handful of benefits it provides. “It’s a good Budget,” we echo the leaders in government and in business, and the economists, and get on with our lives.
Budget 2016 must change this. It must bring dignity into the transaction.
The 12.1% Stakes
The debate whether citizens should be taxed is long over. Apart from a small elite, fed largely by inherited wealth and romantic ideologies, most of us have accepted that we need a government for various services, from foreign policy and defence, to law and order and disaster relief. In India, the politics has decided that voters need the government to grant them rights to work, education, food and so on. It has also decided that governments need money to finance economic services like energy, communication and railways, and social services like education, healthcare and urban development. So those who earn enough have to pay up.
On an aggregate level, this is a fairly simple transaction. Citizens finance the government, the government serves citizens. If the government does well, it gets re-elected; if not, a new government is elected. The government of the day ensures that the lives of its citizens through trade, schooling, jobs, enterprises, religion…go on smoothly, without friction. But beneath this simplicity lies a complex matrix that few, if any, can figure out. In every transaction, from food and education to health and entertainment, the government takes a cut. Again, nobody has a fight with that. In the aggregate, that is.
At an individual level, however, we have several problems with the tax infrastructure, the least of which is the rate. Although in every Budget, the time and space devoted to the rate of income tax is paramount for the media, the reality is not so for income taxpayers, who contribute only 12.1 per cent to total tax receipts. Of course, all of us want lower tax rates. But that is neither the overwhelming thought nor the most dominant component. The Budget has become more of a media event than a policy document. Focusing on it is like looking in a rear view mirror on an expressway. It was important a decade ago, not now, after successive Budgets that have led to tax rationalisation.
In his 1985-86 Budget, V.P. Singh brought four slabs of 25-30-40-50 per cent (the marginal rate applied on income of more than Rs 1 lakh per annum). In his 1992-93 Budget, Manmohan Singh reduced the number of slabs to three and the rates to 20-30-40 per cent. The marginal rate in both their Budgets applied on incomes of more than Rs 1 lakh. In his 1997-98 Budget, P. Chidambaram cut the slabs further to 10-20-30 per cent, with the marginal rate being applicable on Rs 1.5 lakh. Since then, successive Finance Ministers have, in their Budgets, retained both the number of slabs and the rates on those slabs, but increased the applicability. The marginal rate today applies on income of more than Rs 10 lakh, a number that Pranab Mukherji authored in his 2012-13 Budget and which Arun Jaitley has continued with and is likely to sustain in his forthcoming Budget, on February 29.
The 93.5% Madness
To put these rates in perspective, travel four decades back and study the financially choking rates that constricted India’s economic growth like bad cholesterol in arteries. Between 1970-71 and 1973-74, under Indira Gandhi as Prime Minister and Y.B. Chavan as Finance Minister, the peak rate stood at 93.5 per cent on an applicable income of Rs 200,000. Which meant, for every Rs 100 you earned above Rs 200,000 you could legally keep just Rs 6.50, with the government snatching the rest.
You could argue whether the foundations of such confiscatory and extortionist rates came from socialist ideologies that rested on the premise of an all-powerful State delivering equality for all, or from capitalist benchmarking (the marginal rate in the United States around this period was 70 per cent, significantly lower than in 1944-45, when it stood at 94 per cent), but clearly, making honest money seemed closer to being a criminal activity than a legitimate one. This was a period that penalized wealth creation, and possibly nurtured India’s embarrassing relationship with money, a turning point that told citizens to revel in poverty, turned average households into criminals, kicked entrepreneurship in the face and created a whole new industry of organized tax evasion.
Although in the four decades since then, many escape routes for tax evaders have been plugged and the process is ongoing, they continue to haunt traditional areas that have been left untouched—property, gold, chit funds and so on. What may have reduced is their overarching presence in the legitimate economy.
But tax evaders will gather around every rate, howsoever low it be—a lower rate of tax is as much a panacea for tax evasion as higher salaries for public servants are a guarantee for the end of corruption. Both will stay till the end of time. But as taxpayers, we don’t want to feel like fools, our idealism must not be another name for being naïve, our financial nationalism through tax contribution needs to be given greater respect.
Pillorying the honest taxpayer
If the 1970s were a tax nightmare, prosperity has turned India’s new millennium into one filled with hope, powered by conviction that wealth is not only good for individuals but for the nation, its creation a proxy for power, its fastest-growing status the envy across the world. The steady lowering of income tax rates and the high tax collections prove that there is harmony between lower taxes, faster economic growth and higher tax collections. Looking at the issue from another side, in just two decades, we have seen the relationship between the State and its taxpayers transform into mutualism (both benefiting from one another) from parasitic (a small ruling elite and their durbaris benefiting at the cost of taxpayers, not very different from the bacteria and viruses that infect our healthy bodies from time to time). With simplicity of procedures—that still have a long, long way to go, however—the need for employing lawyers and accountants to help avoid and evade taxes is falling. Driven by our ambitions, we can see roads, airports, power plants and other catalysts of prosperity come to life through our taxes.
But the burden of taxes continues to fall on an extremely small minority of honest taxpayers. This scratches at our wounds and they continue to fester. How do you, for instance, deal with the fact that rich farmers do not have to pay any tax whatsoever? Agricultural income of non-agriculturists is used as a conduit to evade taxes and launder funds, the November 2014 Parthasarathi Shome committee noted, and argued that farmers with incomes of Rs 50 lakh and more per annum should pay taxes. Predictably, its recommendations were sacrificed at the altar of political extravagance. It hurts.
It gets worse for the honest taxpayers. In tune with the government’s objective of financialization of the economy, she invests in assets that are productive, that is, can be used by companies to build enterprises and create wealth in the economy, through instruments like mutual funds, pensions, stocks, bonds. For each of these, she needs to follow a strict KYC (Know Your Customer) regime. No problem there, either. But when she sees the unaccounted-for money of her wealthy neighbour going into property and jewellery, where up to half the transaction is in cash, with no tracking of its KYC and no financial disclosures, it creates a social and psychological disconnect that brings the contempt the system has for taxpayers to life. As the black economy, estimated to be anything between 50 per cent and 100 per cent of the real economy, dances freely, honest taxpayers bear the brunt. It hurts.
The Indian hypocrisy on money
The root of this decay of India’s tax infrastructure is possibly our understanding of and dealing with money. A bizarre relationship with wealth has distorted India into a nation that takes great pains in neglecting this transformative force. It has created a sublime sense of a double-standard morality that ensures we eschew and even reject wealth on the outer core while hoarding it with greed under the cover of that intoxicating falsehood. This morality prevents us from embracing its various dimensions—creating it, spending it, investing it and giving it. And taxing it.
As with citizens, so with the government. If citizens carry a disdain for this idea and are embarrassed about it, so will the governments they elect and the officials that execute mandates. The evolution of India’s tax policy perhaps stems from this scorn for wealth. So does the power of the taxman. Looking at us like money vermin whose sole aspiration in every Budget is a cut in tax rates or a new loophole to salt away some crumbs, the system must be laughing at us. Why bother avoiding taxes, when we can evade them with greater ease and no penalties? It hurts.
We build our little protectorates to eke out an existence, indulge a bit and hope our children start out better. Into this process enters a tax infrastructure that, at one end, magnifies our perverse relationship with money and, on the other, ensures we are kept on our toes, with enough fine print to nourish an entire industry of accountants. All this while ensuring that we, who pay taxes, are always on the edge, wondering when and for which breach we will be hauled up in the Kafkaesque ravines of law. It hurts.
This needs to change. Taxpayers need to be respected. Their contribution needs to be acknowledged. They need to feel like builders of a new India, not criminals or naïve. There is enough force going into reducing income inequality; it is time now to reduce tax inequality by expanding the net. The government, irrespective of its complexion or ideology, must stop thinking about citizens giving their due; it needs to think about giving taxpayers their due. The first Finance Minister to address these concerns will be one who would create a whole new constituency of taxpayers. Jaitley’s Budget 2016 has that opportunity (see box). If he takes even one step in this direction, the healing of our wounds might begin. And we will bring dignity in the hands of taxpayers.
Nine Ideas For Dignity
What we need is a reform of tax administration. How do we start? There are several ways, the primary of which is to bring humaneness rather than just numbers to oversee a process that has respect towards taxpayers embedded in it. Nine ideas follow and I invite you to add to this list.
• Treat taxes like insurance. For all income taxpayers, create an instrument of safety net that ensures protection in case income ends. Before you scream this is elitist, do understand that the poor already have several such schemes. It is the taxpayers who need a symbolic sense of security.
• With the advent of the information age, instant communication, mobile money and commerce and digital life, it is shocking that in a country of 1.25 billion people, only 35 million pay taxes. Beginning with Budget 2016, every Budget must ensure that this rises to international standards. Everyone need not pay at the marginal rate. But the number of taxpayers needs to multiply, not merely grow. To put this in perspective, France, with a population of 66 million, has 37 million taxpayers (that is, more than half the citizens pay taxes); the United States has 122 million taxpayers in a population of 319 million (two out of five citizens pay taxes); almost half the population in the United Kingdom pays taxes. Surely, Jaitley can target 10 per cent during his tenure.
• Use the creative energies of the nation to bring non-taxpayers into the tax net. There is absolutely no need for rich farmers to not pay taxes. If a farmer earns an income above a certain threshold—and no exemptions there—he must pay taxes, period. What makes farmers superior to doctors or administrators or lawyers or soldiers?
• Bring the weight of the State machinery to bear down on tax evaders. Start from the top. Catch the big fish. A demonstration effect will trickle down. Focus on large property transactions, gold and all instruments under the KYC radar. Close all loopholes through zero-tolerance execution, with penalties for compromised officials.
• Reshape incentives of tax officials to serve rather than threaten taxpayers. You are already talking to someone who is paying taxes. If there is an anomaly, it can be fixed without threat, harassment or bribery. A little training in human relations, citizen service and general etiquettes won’t hurt. Penalize officials for harassment.
• Send each and every taxpayer a note of gratitude, a certificate of honour, signed by the Finance Minister—even an email or an SMS would do.
• Give each taxpayer a sticker she can place on her vehicle.
• Make paying taxes an aspirational idea, bring pride into the transaction. At the national level, call India’s top 25 taxpayers for a dinner at 7 Race Course Road with the Prime Minister and the Finance Minister. Capture each taxpayer on a “selfie”. Do the same at the state level with the Chief Minister and the state Finance Minister.
• Until the percentage of taxpayers rises to 25 per cent, introduce reservation for all taxpayers in schools, colleges, jobs. Again, it could be symbolic at 1 per cent. Once the number crosses 25 per cent, end this reservation. (Conceptually, I am against all reservation but if that is a legitimate political tool, it should apply to this minority as well.)