Economic Highlights
New Delhi, 11 September 2008
Pay Panel Gains
CUT TAXES TO BENEFIT EMPLOYEES
By Shivaji Sarkar
Government employees are upbeat over the Sixth Pay Commission
report, little realizing that more than them it is the Government which is the
main beneficiary. Of the Rs 16,000-crore benefit that the panel is supposed to
give over Rs 5,300 crore would go back to the Government by way of income-tax
at 33 per cent alone. In fact, some employees would now be subjected to an
additional tax as their salaries would touch the Rs 10-lakh per annum mark.
In its latest report, the Reserve Bank of India has come
up with the desired suggestion of reducing the income-tax rate and raising
exemption limits, for increasing the disposable income and ease inflationary
pressure. The high inflation rate, around 13 per cent on wholesale price index
(more on the basis of consumer price index) has already eroded substantial part
of the pay panel benefit. The taxes would eat up the rest.
It is well-known that wage revision is undertaken primarily to
neutralise the effect of price rise. One, it is dearness allowance component
which takes care of it marginally. Two, it keeps the market going at an even
pace. For with higher wages one is expected to increase purchases and help
other sectors of the market.
It is no secret that the market is highly depressed owing to
high inflationary pressure. Industrial growth too has slid. “There are also
some downside risks to the industrial growth momentum during 2008-09”, admits
the RBI. Growth in other sectors too has fallen including infrastructure, power
and the core sector. Thus raising, what RBI says are “apprehensions regarding
sustainability of industrial and manufacturing growth”.
Clearly, the central bank is concerned that inflation has
eroded the disposable income of the middle-class, supposedly the “engine” for
overall growth. It has, in no uncertain terms, expressed concern that the Government
has not taken any step to rectify this and is circumspect on the benefit to the
market of the so-called ‘higher wages’ of Central Government employees.
Moreover, the RBI is wary that as the salaried class is in a tight spot, it may
default on repayment of EMIs and pose a risk to the banking system.
In the face of the above, the RBI has thus vociferously
suggested “adjustment” – the bank’s euphemism for reduction – in the income tax
and excise duty for increasing the disposable income of the middle-class. “It
may have a possible impact on consumption demand for industrial goods,” is the RBI’s
guess.
In all fairness, higher salaries were expected to surge
other economic activities. But with the government policy eating into the kitty
itself, that opportunity is lost. Therefore, it is time the Government has a
re-look at its tax policy. The taxes, be it corporate or personal income-tax,
remain at a very high level. Over the years, big time industrialists--Rahul
Bajaj, Arun Bharat Ram or Sanjiv Goenka, Nusli Wadia, or Ajay Piramal-- have expressed
concern over the high tax regime. There is unanimity that high taxes only lead
to avoidance and evasion. And yet our Government has unfortunately not tied up
the taxes with its liberalisation policy.
Moreover, often taxes are unproductive and unimaginative.
The answer lies in lowering the taxes and abolishing the personal income tax,
which unfortunately has come to be known as the “impoverishing tax”. The Kelkar
committee had estimated that 48 per cent of the direct tax collected goes into
tax administration! It is certainly one of the most expensive systems of
realisation of resources. Any corporate would simply go bust at this kind of a
cost.
Let’s study the scenario. Today, there are more I-T
commissioners and naturally the administration costs have gone up. In addition,
the income-tax department has started spending on decorative and unrelated activities.
As such, the Government not only needs to review the size of the department but
also prune it. This apart, extra staff in a department means not so clean
operations, as some instances have shown.
Many a times the large official force ends up causing harassment
to the public simply because it is under pressure to justify its existence. This
again adds up to the cost. Then there are the subsequent litigation and appeal
processes, which too are a burden on the economy, other than causing loss to
productive man hours. The cumbersome I-T rules only make the process more
difficult. A Mahabharata of rules are eventually added every yea and each has
several interpretations.
In the past, the Government has had the experience of overall
higher tax accrual following tax rates being moderated from 97 per cent to 33
per cent. This meant an erosion of over one-third income in direct tax. And,
there are umpteen cases of indirect taxes, which rob an average Indian of
almost another 40 per cent of his/her income.
Thus, it is crystal clear: tax rates need to be cut. Finance
Minister P Chidambaram must examine the pros and cons of a high tax regime carefully,
so that all the money that is being generated is gainfully utilized and not
burnt up. The Government should, in fact bring it down to the level of five per
cent for an income up to Rs 5 lakh a year and beyond that to a maximum level of
10 per cent. Even the corporate incomes should not be taxed at more than 15 per
cent.
Let’s face the fact that if the taxes were low, people would
voluntarily prefer to pay rather than avoid these. At the same time, the Government’s
coffers would get bulkier as more and more people would be integrated with the
system. As of now most taxpayers are out of it and the taxmen are well
aware.
What is being suggested is no revolutionary step. It only
makes the tax system more imaginative, less exploitative and interwoven with
market realities. At the end, an affordable tax regime would reduce the cost of
tax policing, boost the market and bury inflation. –INFA
(Copyright,
India News and Feature Alliance)
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