Itsy Bitsy Tee­nie Wee­nie Tax

Once tax com­pli­ance im­proves, the rest of the pieces of the econ­omy and democ­racy will fall into place

The Economic Times - - The Edit Page - Gokul Chaudhri

The Eco­nomic Sur­vey 2017 opens with eight in­ter­est­ing facts about In­dia. The one that caught spe­cific at­ten­tion is that “In­dia has seven tax­pay­ers for every 100 vot­ers, rank­ing us 13th among 18 of our demo­cratic G-20 peers”.

No doubt the statis­tic that the coun­try’s tax-to-GDP ra­tio is low com­pared with the rest of the world, is well known. Now, we know why tax­payer con­cerns are still not such a ma­jor agenda with our par­lia­men­tar­i­ans, given that 93% of their con­stituency of vot­ers do not con­sti­tute tax­pay­ers. And pos­si­bly why we wit­ness lack of tax­payer ser­vices. Equally in­ter­est­ing in the find­ings of the Sur­vey are three other facts on tax­a­tion.

Well-Oiled Ex­cise Duty

Firstly, the Sur­vey states that the most no­table fea­ture on rev­enue col­lec­tion has been the over­per­for­mance (even rel­a­tive to Bud­get es­ti­mates) of ex­cise du­ties based on buoy­ant petroleum con­sump­tion. More broadly, tax col­lec­tions from petroleum sec­tor have held up to a greater ex­tent than ex­pected pos­si­bly due to pay­ment of dues be­ing in de­mon­e­tised notes. Most an­a­lysts ex­pected that the Inco- me Dis­clo­sure Scheme would help meet the tax tar­gets. How­ever, the in­di­ca­tion from the Sur­vey shows that the in­creas­ing levy on low oil prices has bailed out the ex­che­quer.

This was an out­come of a con­scious pol­icy de­ci­sion. When oil prices started de­clin­ing, In­dia in­creased the ex­cise duty on branded petrol and diesel — the in­crease in petrol tax has been over 150% in In­dia. In con­trast, gov­ern­ments of most ad­vanced coun­tries have sim­ply passed on the ben­e­fits to con­sumers, such as UK hav­ing re­duced taxes by 28.8%. There­fore, nei­ther the ex­panded tax rules for cor­po­rate In­dia nor the amend­ments in ser­vice tax have contributed as ma­te­ri­ally as the sim­ple levy of ex­cise du­ties on petroleum prod­ucts.

This brings us to the next in­ter­est­ing ob­ser­va­tion: the gov­ern­ment’s de­ci­sion to im­pose taxes on petroleum prod­ucts leads In­dia to an im­plied car­bon tax; In­dia moved from a regime of car­bon sub­sidy to one that im­posed­car­bon­tax­on­petroleumprod­ucts at about $150 per tonne, which is six times greater than the in­ter­na­tion­ally rec­om­mended stan­dard. In­dia is one of the few coun­tries to also im­pose a tax on coal, which dou­bled in 2016-17 to .₹ 400 per tonne. Tax pol­icy in In­dia is cer­tainly con­tribut­ing ma­te­ri­ally to green ac­tion as re­flected in the var­i­ous projects and pro­grammes now funded via the ded­i­cated cesses or via the cen­tral al­lo­ca­tions.

The third in­ter­est­ing di­men­sion is that tax on black money is cited as the first and fore­most ben­e­fit from the re­cent de­mon­eti­sa­tion. The Sur­vey holds that in­come-tax col­lec­tions have risen due to in­creased dis­clo- sure. Added to this, pay­ments to lo­cal bod­ies and dis­coms also rose as de­mon­e­tised notes re­mained le­gal ten­der for tax pay­ments/clear­ance of ar­rears, in­clud­ing lo­cal taxes.

The Sur­vey has also cap­tured an eye-pop­ping statis­tic on prop­erty tax. It says that ev­i­dence from satel­lite data shows that Ben­galuru and Jaipur col­lect only 5-20% of their po­ten­tial prop­erty taxes.

In the Long Run, More Tax

Over the long run, the Sur­vey es­ti­mates that tax col­lec­tion should in­crease as for­mal­i­sa­tion ex­pands and com­pli­ance im­proves. Wisely, the Sur­vey also notes that tax ar­bi­trari­ness and ha­rass­ment could im­pact cred­i­bil­ity. The mes­sage is clear that the de­mon­eti­sa­tion can de­liver long-term tax ad­van­tage via en­hanced tax base, as long as the tax ad­min­is­tra­tion en­gages with the tax­pay­ers with ac­count­abil­ity and, hope­fully, our tax rates mod­er­ate on a grow­ing tax base.

The Sur­vey does not dis­cuss what could have been the im­pact on tax col­lec­tion had a (sec­ond) in­come dis­clo­sure scheme been an­nounced along- side the de­ci­sion on de­mon­eti­sa­tion on Novem­ber 8, 2016. It talks of the sub­stan­tial loss on “con­ver­sion fees” that was in­curred by black money hold­ers. This could well have been cap­tured as taxes had an ef­fi­cient in­come dis­clo­sure scheme been an­nounced and im­ple­mented in par­al­lel.

The Sur­vey also ac­knowl­edges that with more for­eign trade pacts, along­side GST-in­duced tax ra­tio­nal­i­sa­tion and labour re­forms, there could be con­sid­er­able job cre­ation. Al­ready, the an­nual work-re­lated mi­gra­tion is about nine mil­lion and our dis­tinc­tive de­mo­graphic div­i­dend is yet to peak. This would mean an ex­panded tax­payer base in In­dia.

Pos­si­ble, in a decade or less, the first-men­tioned in­ter­est­ing fact that In­dia has only 7 tax­pay­ers per100 vot­ers could un­dergo a ma­te­rial change. Then, surely the voice of tax­pay­ers would be heard, loud and clear, and their in­ter­ests re­flected mean­ing­fully in our demo­cratic de­ci­sion-mak­ing.

The writer is leader (di­rect tax), and in­puts by Puneet Gupta, as­so­ci­ate di­rec­tor (di­rect tax), BMR & As­so­ci­ates

This would just about cover ev­ery­thing

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