Mainstream, VOL LI, No 1, December 22, 2012 [Annual 2012]
Taxation and Disparities
Thursday 3 January 2013, by#socialtags
The question is often asked: Is taxation in this country equitable? On the one hand national income has gone up, on the other economic disparities have widened. In this article, which is based on an exclusive interview to Mainstream, one of India’s foremost economists gives expression to trenchant views on this
The fiscal policy of the Government of India in the last ten years has not been specifically oriented towards reduction in inequalities of income.
If we look at the structure of income tax and super tax rates in the last ten years, we find that the rates of taxation on the higher slabs of incomes have actually been brought down as compared to the rates that prevailed before 1952. Whatever effect the tax system could have on reducing inequalities of income had already been incorporated into the pre-1952 rates; and what has happened since then has been to reduce the rigour of personal taxation on the higher slabs of income rather than the other way about.
Of course, I do not think that the Government of India can necessarily be blamed for this policy. The rates that we impose on higher slabs of income in this country are already very high. If these rates were really effective, there can be no doubt that the fiscal system should have been a most powerful instrument for reduction in inequalities. That this has not been so in the last ten years is, in my opinion, not due to insufficient progression in the income tax and super tax rates. It is much more due to the fact that there is a great deal of evasion of direct taxation in this country, and even more, there is a great deal of legal avoidance of direct taxation.
Evasion and Avoidance
I am afraid both evasion and avoidance are found to a significant extent in the upper ranges of income. What is needed, therefore, is a much greater strengthening of the tax-collecting and evasion-detecting machinery on the one hand, and a much firmer and more comprehensive attempt at reducing the scope for legal avoidance on the other.
I must add that some attempt has been made in recent years to reduce inequalities of wealth by the imposition of a wealth tax; but the effect has not been perceptible, partly because of evasion and avoidance and partly because of the low rates of the tax on wealth. If we want to make the tax system a more effective instrument for reduction of inequalities of income and wealth, what we need are effective steps to reduce evasion and avoidance of income and wealth taxes and a rise in the rates of wealth tax.
Another much needed fiscal reform for linking up taxation with the increased incomes that have resulted from ten years of planned economic development in the higher taxation of rural incomes of Rs 3000 and above per year.
The last ten years have seen the emergence in the countryside of a substantial middle class and a significant rise in the levels of incomes of what may be called middle or upper class farmers. The incidence of land revenue on these classes is negligible. These classes are not subject to the Indian income tax and super tax. It is true that in most States there is an agricultural income tax, but these agricultural income taxes function with far less operational efficiency than even the income and super taxes.
Moreover, the rates of agricultural income tax are much lower than the corresponding rates of income tax and super tax. I know that political difficulties are involved in taxing the rural middle and upper classes. But the fact that these classes have escaped paying their fair share of taxation in spite of increased incomes is not a desirable phenomenon. The earlier steps are taken to remove this lacuna in our fiscal system, the better it will be not only from the point of view of increasing our revenue but also from that of imparting a more equitable character to our tax system.
I do not think there is scope for any reduction in income tax in the lower slabs. I know that the lower middle classes in this country feel very aggrieved at their deteriorating economic condition. But the remedy for this is not a reduction in income tax. In fact, the rates of income tax on the lower slabs of income are much less in India than in most other countries, Japan furnishing a conspicuous illustration of this difference.
What is needed for the relief of the middle class is more employment opportunities and firmer action in holding down the rise in prices. To think that tax relief would do them much good is to misunderstand the essential nature of the economics of the problem faced by the lower middle classes in this country.
I think it is necessary for the country to pay higher rates of taxation than it is paying today. In most countries of the world, the proportion of national income taken by way of taxation is of the order of 25 to 30 per cent, while in our country it is more in the region of 11 to 12 per cent.
I know that there are important reasons why the overall rate of taxation as a proportion of national income should be lower in India than in the developed countries. Thus, for example, a large proportion of our national income accrues to people with very low personal incomes and therefore does not represent much of taxable capacity. It is also a fact that a substantial portion of our national income is of a non-monetary character and therefore difficult to bring within the scope of taxation. All the same, I refuse to believe that we have reached the limits of our taxable capacity.
Only, I would like to stress with all the emphasis at my command that unless there is economy in administration, and the people are satisfied that the moneys taken from them by way of taxation are used in the most economic and productive manner, it will be difficult to get the co-operation of public opinion in raising more taxation. And in a democratic country it is not possible to raise more taxation without public support, and public support will not be forthcoming as long as there is extravagance, waste and conspicuous consumption in public expenditure, which, I am afraid, is the case in India today.
I do not think there was anything wrong in repealing the Expenditure Tax. The Expenditure Tax was ill-conceived as far as its practical effects were concerned, and experience has shown that it has not served the purpose for which it was intended. A far more effective way of providing disincentives against high expenditure and wasteful consumption and therefore making it possible to increase the rate of savings is to levy high taxes on individual articles of luxury consumption.
I do not think we have sufficiently explored the possibilities of sumptuary taxation in this country. I am, therefore, in favour of a series of specific expenditure taxes directed against specific acts of luxury consumption. The objective of these specific taxes should be not so much to raise revenue as to prevent wasteful expenditure and thus channel incomes into additional savings.
I do not think there is anything like a theoretically valid and ideal proportion between direct and indirect taxation. I would also say that in a country like India, where the bulk of people have low personal incomes and where it is both politically and economically difficult to have a nationwide system of direct personal taxation, you cannot escape giving indirect taxation a higher place than, for example, would be necessary in a country like England or the United States or Sweden or Australia.
But this does not mean that the present distribution of the Indian tax system between direct and indirect taxation does not require a review. I should like to repeat that what we need in this country today is not so much higher rates of direct taxation on the upper slabs of incomes as a far more determined effort than what we have seen so far at reducing the scope for avoidance and preventing the evasion of direct personal taxation.
Steps for Socialism
I do not think we can bring about a speedy transition to a socialist economy in this country merely by manipulating the tax system. If we want to bring about the transition to a socialist economy, the major instruments for doing so are the expansion of the public sector and increase in its efficiency, equalisation of opportunities through scholarships and welfare services, and imposition of ceilings on personal incomes and property.
(September 1, 1962)