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|January 30, 1998||
Issues '98/H P Ranina
'We have to change our system to fight the evils of the cash economy'
The government's top priority is to correct the fiscal deficit. To do so it will need substantial revenues. Revenues can be in the form of direct and indirect taxes, because the government has borrowed enough money. Just the interest on the money borrowed amounts to Rs 600 billion every year, which may now go up to Rs 650 billion.
The only solution is to reduce the borrowing, and to do that they will have to resort to taxation. Indirect taxation in India is very high, the total amount collected is 62 per cent of the total revenue, so we will have to make collections by increasing the direct taxes. In every country of the world, direct taxes are more than indirect taxes.
To increase taxes, the government will have widen the tax base, because out of 975 million Indians, only 10 million pay taxes! This is partially because the government is not able to reach out to the vast number of middle class, who are reputed to be around 200 million. We also exempt agriculture income from taxation. Nothing wrong because agricultural income is taxed by the state government, but not by the central government.
But as a result, people in the rural areas have developed an attitude of not paying taxes, taking that as their birthright. What is exempt is income from agricultural produce, not just all income. People doing business in the rural areas such as moneylenders, shopkeepers, suppliers, etc, surely they can and should pay taxes. Recently, the newspapers reported how farmers in Andhra Pradesh committed suicide because they could not repay the moneylenders. One moneylender said he had lent out Rs 40 million. Now, if he has lent Rs 40 million, his income must be around Rs 10 million, because they charge interest at 25 to 27 per cent; but I am sure he doesn't pay taxes!
Thus you have created an environment of not paying taxes, and the income tax department has never tried to collect taxes from the rural areas.
One fact that has emerged from the success of the VDIS is that when the government effectively cracks down and collects taxes, then the response of the people is quite substantial. So the tax administration is to blame for its inability to collect taxes. If the same grit that was shown by the tax administration as it did in the last few months of 1997 for the VDIS, the tax administration can mop up much more money under the present laws, and the government has all the powers to do it.
If you look at the latest figures, the total revenue collected by way of tax by the Government of India is around Rs 1,500 billion, which at US $ 1=Rs 40, amounts to $ 37.5 billion. This is the total revenue collected by the government by way of taxes: direct and indirect, excise duties, customs from individual and corporates, etc.
Yet, according to Fortune International magazine, just one large corporation in Japan paid taxes amounting to $ 175 billion!
So what India collects by way of tax is just not enough to meet our Budget requirements, causing the fiscal deficit to go up. Any new government that takes power will have this uphill major task of collecting more tax.
Widening the tax base means increasing the number of tax payers from the current 10 million to 75 million, at least. Let me give you some figures about income tax: it is estimated that in the 1997-98 budget, income tax collected from individuals will be around Rs 210 billion. Whereas if you widen the tax base, and if 75 million were taxed at minimal standards at an average of Rs 1000 per month, it means 12,000 per annum per person; the total collection would go up to Rs 900 million.
Now, to achieve this, the question is how will you assess them? Will you go into the books and accounts of 700 million people? This will lead only to harassment, corruption, and inconvenience of millions of taxpayers, and we need to do it differently. The time has come when we have to move away from this obsession of determining one's true income. It is just not possible, nobody ever gives his true income and no tax officer has ever been able to assess anyone's true income.
The only solution, as I see it, is to adopt some objective method of determining one's income by some objective method. It would not be an accurate figure, but it would be an indicative figure. I have framed three parameters on how this can be done, based on information the government already has:
1. Electricity bills, because the electricity bills are completely computerised;
2. Telephone bills, these two are mostly computerised, especially in the big cities; and,
3. Property taxes, which would come from the municipal authorities.
Collecting this information is not too difficult, which can then be put together for total expenditure. The next stage is to put a multiple on the total expenditure incurred. The multiple should be of six, and the reason is that on an average, a family would tend to spend one-sixth of its income on such matters, the remaining going on food, rent, etc.
Suppose a person's monthly total expenditure on these three items is Rs 2,000; multiplied by six it amounts to Rs 12,000, and this is the figure can be estimated as the income and it can be taxed, starting from a low level levy of 10 per cent.
Now, in this way, you can cover a large number of people in every city and town having a population of over one million. Today, over 36 cities have a population over one million, and everybody who has this kind of expenditure, can be taxed. So instead of trying to determine the income, and making the people file a return (as the law today states), the income tax can determine the income from these three sources, assumed correct, and the persons taxed accordingly. If people dispute the figures, they can take up the matter.
The advantage of this system is that it would spread out the tax burden widely to over 75 million. How did I reach this figure of 75 million? As per my statistical figures, collected from the Statistical Outline published by the Tatas, there are 200 million pucca (cement) houses in India, all over the country. These include the rural areas; there are rich farmers in Punjab who have beautiful houses with swimming pools. If we can cover these kind of people, not all but just 75 million -- which means I am still exempting 900 million people -- I am sure the country can generate a substantial amount of revenue. Much more than the 210 billion collected today; at least 900 billion.
The above method will not mean a larger bureaucracy, which many people mistakenly assume. If we carry on with the present method will mean an income tax department at least 10 times larger. The system I have suggested is followed in some other countries: based on certain objective methods that cannot be denied. In course of time, other expenses such as travel, etc, can also covered once computerisation comes in.
In fact, we have to change our system to fight the evils of the cash economy. The present cash economy is responsible for the black money, corruption, tax evasion, terrorism, and all kinds of social evils. The only way to fight this evil is to reduce the dependence on cash, not overnight, but over a period of time. For instance, we can pass laws that says nobody can buy a travel ticket except on a credit card; no one can buy petrol without a card. India is developing a very good technology for smart cards.
So if we slowly move towards a cashless society, dependent on smart cards, at least in the bigger urban areas, then a real dent will come. If a man cannot spend money in cash, why will he collect cash under the table? So the entire problem of tax evasion and corruption is this four-letter word: cash. This will also widen the tax base.
But before that, if we put into place the system I suggested, then also we can make an improvement. Because once a person is taxed on his expenditure, he will have no need to hide his income. Take, for example, the case of doctors. I am sorry to say, but among the professionals, doctors are the biggest tax evaders today. They work in cash, make pots of money, and don't know what to do with it. In the bargain, they also lose a lot of money to the chartered accountants who handle their tax problems and often take them for a ride. If these people are brought into the tax net and given a minimum tax, then he will no longer hide his income. Thus, this system will also reduce the black money in society, and which will have a great beneficial effect in the society.
We need to bring about a sea change in the way our economy runs. For instance, if we can pass a law that all petrol in Bombay is to be sold by credit card, then I can use the expenditure on petrol also as a basis for taxation. But the thrust has to be on change. And for this the people of India are to blame. Indians will always complain that the government should bring in more reforms and do more, but are the people willing to reform themselves. They are not, and therefore, must be forced to reform.
H P Ranina, one of India's foremost tax consultants, spoke to A K Diwanji
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