Openomics 2019

Still Waiting for Relief

Madhavankutty Pillai has no specialisations whatsoever. He is among the last of the generalists. And also Open chief of bureau, Mumbai  
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Any radical tax break for the salaried middle class is always going to be a chimera

FIVE YEARS AGO, before the 2014 General Election, I had met a group of citizens who, under a movement named Arthakranti, were actively campaigning for a system that would have zero income tax. The Goods and Services Tax (GST) was just on paper then, but their proposal also did away with sales tax, excise, Value Added Tax (VAT) and all the myriad ways in which governments collect revenues. Only Customs duties would remain, but the purpose of that was not to raise revenues but protect Indian industry. In place of the wilful giving up of all these taxes, their proposal sought to have a simple Banking Transaction Tax. The entire concept was summed up in five points: remove every existingtax; impose a very low tax on bank transactions—if it is 2 per cent, then for every transaction like a cheque deposited, that percentage would be deducted and split among the Central, state and local governments plus the bank itself; no tax on cash transactions; all currency notes of denominations above Rs 50 to be withdrawn; and an upper limit for any cash transaction in the country, beyond which it won’t have legal validity. These steps would push all Indians into the formal banking system and, therefore, even if the tax rate itself would be low, total revenues would dramatically rise because of the vast volumes of bank transactions that conventional taxation does not cover. The simplicity of it would ensure easy collection and inclusion would mean a much wider net cast for it.

In theory, it makes a perfect logical circle. And when the people of Arthakranti went around making presentations to political leaders, they claimed many had evinced keen interest in their proposal. Before the last election, a number of BJP leaders were publicised as having given them a good hearing, including Subramanian Swamy, Nitin Gadkari and Narendra Modi. Obviously, such an idea was never going to become policy because it is too radical and uncertain. No government is going to take the risk of discontinuing a system that brings in most of its money for something never tested even at a municipal level. Also, the idea of paying zero tax has scarce appeal as a political tool in India. This is counterintuitive, since you would think that people would vote to pay less tax, but not so strange because only about 2-3 per cent pay income tax. That contributes to the paradox of India: those who are in the most dependable tax net, or the middle class from whose salaries money is deducted by the Government automatically like clockwork, have almost no political power. In a cauldron dominated by caste, religion and other dominant interests, the taxpayer by himself cannot decide a single constituency’s winner. There is no reason for any government to pamper him.

For the briefest of moments, it was thought that this Budget would be an exception to the rule, as Piyush Goyal, the minister who was presenting it, read these lines while giving his speech in Parliament on February 1st: “Reducing the tax burden on the middle class has always been our priority ever since our Government took over in 2014. We increased the basic exemption limit from Rs 2 lakh to Rs 2.5 lakh and gave tax rebate so that no tax was payable by persons having income up to Rs 3 lakh… Individual taxpayers having taxable annual income up to Rs 5 lakh will get full tax rebate and therefore will not be required to pay any income tax. As a result, even persons having gross income up to Rs 6.5 lakh may not be required to pay any income tax if they make investments in provident funds, specified savings, insurance, etcetera.”

You'd think people would vote to pay less tax, but as only 2-3 per cent pay income tax, those who are in the most dependable tax net have almost no political power

The tax rebate for those earning up to Rs 5 lakh was what got the attention of commentators who were following the Budget live and analysing it. It was immediately assumed that the exemption limit had been doubled, which would have been a truly radical measure for the middle class. But the rebate, while still an advance, was just a minor sop. A post-Budget statement by credit rating agency India Ratings and Research said, ‘The surprise element of this budget was the sops announced for the middle class. However, the announcement related to the exemption of individual taxpayer’s annual income of up to INR500,000 has to be taken with a teaspoon of salt. This exemption is applicable only if the individual taxpayer’s annual income is up to INR500,000, otherwise the previous rates/exemptions of income tax apply.’

The exemption limit, therefore, stayed where it was. So anyone with upto Rs 5 lakh income benefited, but little changed for those earning above that figure who are also very much part of the middle class. The relief was only for the lowest rung, which is fair enough. But it wasn’t, as the initial confusion had suggested, an overhaul of how the middle class had traditionally been treated by the taxation system.

The rebate fits into the textbook definition of how income must be taxed. As against indirect taxes, where the poor and the rich end up paying the same, direct taxes like that on income are meant to be progressive, with those having more paying a bigger cut. This was not always the case and neither was income tax, now equated with death when it comes to the certainties of existence, always part of people’s life. Relative to the history of civilisation, the tax is as young as a toddler. It first made a formal appearance in the modern age in the 1798 budget of the UK as a temporary measure to pay for a war with France. Introduced the next year, it was repealed three years later and then periodically made reappearances when the British government fell short of money until the tax became a permanent fixture. The US Supreme Court in fact once struck down income tax, terming it ‘unconstitutional’. That we now assume a government has an inalienable right to a part of every income is a right that the nation-state appropriated to itself over the last century as its role grew greater in human affairs, like launching welfare schemes and building expressways.

Unlike developed countries, where the returns on a person’s tax are evident to him in improvements in his quality of life, in India, the taxpayer sees no indication of it. For what he is giving, he continues to lead a life of drudgery: of roads filled with potholes, of trains that are overcrowded, of low-quality government medical care, and so on. Also, he does not see the tax as progressive even as a relentless outpouring of subsidies, schemes and offers that bypass him don’t fully reach the target either, thanks to leakage and corruption. On top of that, sections of society which are clearly wealthier escape the tax net. Why, the middle-class salaried person legitimately wonders, are rich farmers not taxed when they earn many times more than him? If politics can keep one class out of the tax net, then his own contribution becomes nothing more than coercion. And wealthy businessmen manage to evade taxes because they have experts advising them on how to game the system.

Most income taxpayers in India wouldn’t have read the Nobel Prize-winning economist Milton Friedman, but would instinctively agree with his argument that complexity in taxation only leads to evasion by high earners. And that the root problem is not absence of revenue, but the propensity of governments to spend with increasing abandon. Friedman once famously said, “I am in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending… The real danger we face is that the number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes.”

In an election-year Budget, there was no chance of any signalling towards small government or spending cuts. There was really no reason for anyone whose vote was inessential to hope for any substantial tax relief. The confusing of ‘rebate’ with ‘exemption’ in the Budget speech made it appear as if the middle class has finally got a long overdue sop, but no government in India was ever going to go that far in one stroke. Every farm loan waiver, whether its efficacy has been tested or not, comes at a cost and everyone knows who has to pay for it.