Saturday, July 30, 2005

Vision For A Developed India-Part 1

This is the first article on the series that I will be writing on my ideas of progress for India.

In this first part, I will concentrate on the Tax Regime.

As we all know that the Income Tax Regime in India is a failed regime. On the first hand, not even 10% of the people who should come under the net pay their taxes. If I remember correctly, the figure was in fact 4%. Apart from that, even for people paying the taxes, things have never been easy. First is the outrageous feeling that what they earn is being forcibly taken from them. And second is the hassle of filing an Income Tax return, and the guilt of lying for many. But when it comes to hard-earned money, who wants to part with it. So as it is a problem for both the government and the population as a whole, it should be scrapped!

In the first look, it seems like an outrageous idea. A big part of government revenues is generated by the Income Tax. Doing away with it will cripple the government's finances. So we must have a way to keep the balance, and in fact for being tempted to change over, the new regime should be at lest twice as better. What I propose as solution is: only indirect taxes should be levied. Here's how it will work.

The biggest problem for the government is that many people who should pay their taxes don't do it honestly. Either they grossly under-value their earnings or not even pay their taxes. The way the judiciary works, people know that its very easy to come out clean. Instead of this, if there are only indirect taxes, those who should, will be forced to pay it. For example, the government can have very little (or naught) tax on agricultural goods like, wheat, rice, sugar, etc. This way the daily laborers who earn only to get a square meal a day can be exempted very easily. On the other hand, the government can adopt a differential taxing policy for different products. For example a higher tax for the lesser basic needs like common electrical appliances (bulbs, tube lights, etc) and a higher for bigger luxuries (mobile phones, TVs, etc.). It will be up to the policy makers to decide what is more luxurious; And mind you, debating this is far more easy than debating whether a particular person needs the subsidy or not. This way, the poor people, with lesser purchasing capacity (for example those living on rotis, onion, milk, etc.) can be exempted while those living on McDonald's French Fries can be taxed suitably. If this system is put into place, more than 80% of those who should pay taxes would be paying accordingly. The rest 20% (a guesstimate) will be those who either by some means will get their products for lower prices or the industries which will not report their profits completely.

Once this system is put in to place, the workforce of the Tax department can be deployed more effectively to look into the industries making it difficult to fake the figures. Also, there would be no hassle for the government for keeping track of tax benefits like purchase of NSCs (as there will be no tax on their purchase) and to those extended to poor farmers, widows of army personnel, etc. Obviously a person who goes to multiplexes won't need tax exemption for it.

Also, there can be differential taxing policy for different regions depending on the need (like air-fare can be taxed less in the north-east).

Another big advantage would be that this system would be psychologically easier to handle. People don't make too much fuss when the many goods are taxed even over 100%, but cry if 2% educational cess is levied.

So far so good, but this system also will have its faults. Let's take a look into them. Firstly, we run the risk of losing the grip on black money. As there won't be any income tax return to keep track of how much a person earns, the amount of black/illegal money will increase in volumes. For this, what seems to be a viable idea is that people should fill in their income returns (please note its NOT Tax returns). This way the Tax Department will have a knowledge of how the money is flowing if they want to conduct raids, etc. Also, for the general population, it won't be a big problem as unless they have black money, of which they can't report the origins, they can fill the returns very easily and honestly. They would rather use their minds on choosing the lifestyle that suits best their need.

The next problem will come from the corporate world which would fight to make its products as less taxable as possible (to boost the sales). But a panel of economists won't have much problem in arriving at conclusion as to what level of taxes are suitable for the particular product. As the number of industries is far lesser than the number of individuals, they can be brought easily under the tax net and taxed for their profits. Any ambiguity can be resolved as and when encountered and even media can play a big role in highlighting whether their is any discrepancy in the taxing policy.

3 comments:

Rambo said...

Ambuj,
Your suggestions are valid suggestions and similar to VAT or Value added Tax as it is called in UK or GST Goods and services Tax as we call it in Australia.

All goods and services are taxed at soirce at 10% flat except agricultural products.

Even if you have a Coffee for $2 per cup you pay plus 10% GST.

Now this is very easy to regulate and collect in Coutries like UK and Australia where there is the discipline the means as well as the law that forces most of the population to follow the rules...

While the concept is good it may be too soon for India where we still are ruled by the law of the jungle where the rich ad wealthy people find ways and means to get out of tax obligations..

Cash businesses will never pay taxes as people will not account for all the takings....

The journey has just begun with the middle class in India waking up and wanting better governance and Internet communication has been a bood to exchange ideas..

The Nation will come good when we elect good and genuine politicians as opposed to thugs and goondas.

Ramboaus
Sydney Australia

Sunny Saxena said...

sounds good. i wait for part 2.

Anonymous said...

10% people in india gives tax