Economic Highlights

New Delhi, 13 December 2013

Lubricating Economy

MAJOR TAX REFORMS VITAL

By Shivaji Sarkar

The economy is in shambles and there is no prescription to revive it. While inflation is robbing people of their purchasing power, high taxes are like rubbing salt to injury. It is time India takes a fresh look at its direct taxes and abolishes these. In fact, tax reforms are considered a first in checking inflation.

The average inflation during the past four years comes to 41.93 per cent. The rising inflation is hitting factory output, which came down to a low of minus 1.8 per cent, a consistent trend seen for the past many months. Food inflation rose at 14.2 per cent annually and vegetable prices rose by 61.6 per cent. Correspondingly, owing to high taxes, Rs 4 lakh crore, termed as ‘black money’, is reported to have been parked abroad in 2011.

The industry chambers led by PHD Chamber of Commerce have now started demanding doing away with personal income tax. For the first time, at least a major political party, the BJP, says it is mulling over its abolition, as per its leader Subramanyam Swamy.

The various so-called reforms, be it the Pension bill, Insurance bill or opening up some other sectors to foreign funding, are unlikely to help the common man. Additionally, the opening up of the retail sector is playing havoc. The organized retail chains remain unchained and are known to fuel inflation through manipulative practices.

The only sector that is gaining in the economy is that of retail. Even this is known to use the wholesalers to maximize its profits. As is well-known, vegetable prices used to have seasonal variations but the retail chains have twisted the market dynamics which has resulted in severe price rise.

The consumers are thus losing at all levels, with nobody there to help them. In such a situation, dodging of taxes becomes natural by all those who can do it. Even gold imports are a way to shield wealthy people against paying taxes. While such activities help the “capable” ones escape the tax net, the large salaried middle class becomes a victim. It can neither escape paying taxes nor can it shield itself against high inflation.

This is reflected in the falling savings rate. Three years ago, it was around 33 per cent and came down to 30 per cent in March this year and is set to fall to 27 per cent, according to Japanese brokerage firm Nomura.

This is an ominous sign. One reason for the fall is attributed to income tax on bank deposits. The poor are the worst hit. They earn less and pay more on taxes. Though technically it can be reclaimed from the I-T department, but the procedure is so cumbersome that most prefer to give it a go by.

The rich have options to put their money in parallel “underground” market instruments and operate through hawala. They not only save their money but also go out of the tax net. Besides, sizable sections have access to foreign banks, again through the hawala route and stack precious money for the benefit of the country’s detractors. On an average, between 2002 and 2011 every year Rs 1.6 lakh crore went as illicit outflow – a total of Rs 15.7 lakh crore in about a decade.

Interestingly, it is far more than the accrual of income tax to the exchequer, according to the Comptroller and Auditor General compiled data. In 2002-03, Rs 36,866 crore was collected as income tax, in 03-04 it was 41,379 crore, in 04-05 it was 49258 crore, in 05-06 it rose to Rs 55,976 crore, in 06-07 it yielded Rs 75,093 crore, in 07-08 it was 1,02,644; in 08-09 it was Rs 1,06,046 crore, in 09-10 it touched Rs 1,22,370 crore, in 10-11 rose to 1,39,102 crore and in 11-12 it touched Rs 1,64,525 crore.

It may be noted that the sudden rise since 2009-10 is attributed not to a booming economy but large chunk of benefits that had gone to Government employees because of the pay revision as part of the Sixth Pay Commission recommendations. In reality, business and other classes are not contributing much.

In fact, during this period, excise duty collection has decreased. This is evident from the drastic fall in excise duty collection since 2008-09 and is a pointer to poorer economic activities. During the same period, annual I-T refunds have touched over Rs 70,000 crore.

The cost of tax administration during this period has almost doubled to around Rs 2 lakh crore a year. The assets of the income tax department have quadrupled. In other words, even if the yield has gone marginally higher, the outgo of revenue has increased. The TDS on bank deposits has also increased cost on banks as well as individuals. It has made banking expensive.

Virtually less than 3 per cent or 4 crore people of 121 crore are made to pay income-tax. It is the core salaried middle class which pays it and the rest divert it to other channels. The industry says that while each income-tax raids may yield the Government a little, it robs it off crores. So, where does this money go?

Undeniably, income tax is not helping the economy much, rather is leading to its erosion. The Government has a lop-sided approach. If I-T is abolished, the Government would not have to burden itself for recapitalizing public sector banks. Not only the middle class, even the business class would like to put in its money in less risky bank deposits. This would increase availability of funds to the banks.

What then is the answer? Well, reforms have to be brought in taxes. Direct Tax Code does not address the core issues. In fact, it is estimated that if I-T is abolished, the country would gain in two major ways – the savings rate would increase and funds would stay in the country and not be siphoned off.

It also calls for rationalization of excise duties and service tax. In a World Trade Organisation hit economy, excise duties should be at a flat rate based on 21 major commodities that give 91 per cent of the revenue.

The rationalization of taxes could boost economic activities, increase fund availability and remove the undue fear of the “raid and notice culture”. This, indeed, would be a great lubrication for the economy. ---INFA

(Copyright, India News and Feature Alliance)