Government: big, small and tax exemptions

There has long been a debate between the libertarian argument for small government and various versions of an enhanced role for the state. The latter ranged from scientific socialism (as in the former USSR), to softer (and workable-when-adaptable) versions of the 1930s New Deal in the USA and the post-World War II social welfare state in Europe.

In our own country, the vision of the Mahatma was closer to the libertarian idea of a state, while what came to pass was much heavier. Just as the Chinese are fond of adding with Chinese characteristics whenever a paradox needs to be explained, we are the worlds greatest obfuscators. Thus, the official version of our recent history would postulate an unbroken continuity in the articulation of the role of government in public policy from Mahatma Gandhi to present times. The consensual or inclusive nature of the Indian tradition has great merits and is, indeed, the bedrock on which the nation exists. But when it comes to public policy, there is an imperative to call a spade a spade, not a forklift truck.

After Independence, we chose the option where government played the lead role in economic governance, pushing markets to the periphery. The strategy had some merit in the 1950s, but had outlived its utility by the end of the 1960s. But public policy is a poor candidate for adaptive learning. Policy objectives tend to be legitimised in a psycho-babble of virtue and public morality. How else could economic agents and institutions be perceived in the light of good and bad, whether it be markets (and prices), private and state ownership, domestic and foreign investment, etc.?

Not much is new about this, but how this bears on fiscal policy. Big government is one that does plenty of nice things like social welfare public health, education, income support for the poor, and the elderly, as well as physical infrastructure like roads, railways, irrigation and metros costs plenty of money. So, you need to have high taxes on income, on property, on goods and on services.

But for the contract to hold? that is, for the government to try and deliver the cornucopia of welfare goodies?there must be a consensus amongst the citizenry that they will bear the counterpart burden of taxes. Here is where the Indian characteristics comes in. The entire farm sector has effectively been exempted from income tax and permits rich urbanites to dodge tax; hard-earned money, as well as bribes and cutbacks can be declared as farm income. Tax evasion and avoidance is a high art in this country, for those whose incomes are not derived from agriculture.

Further, government is helpful and has provided other legal means. The tax code is full of exemptions. These make headlines, but somehow, both the media and the reader seem to believe that this is all about Section 88 savings. The ignorance is because we do not even know what the quanta of the various exemptions are. The annual Budget, and the exercise of placing it in Parliament and in the public domain, is with the purpose of enabling informed debate of how government raises taxes and spends it. Exemptions are, however, not disclosed. They are netted out from the tax collections directly and not reported as expenditure. Thus, if someone has claimed an exemption under income tax, it is the net tax amount collected that is added and reported. Simi-larly, if an ex-porter has claimed refund on excise or customs, the collections net of such refunds are reported.

Clearly, this non-disclosure of the quanta of exemptions makes it very difficult to start a meaningful public debate. How can you have an argument about something whose magnitude is unknown? That is only possible in theology. India has a commitment to openness and we should, as a necessary pre-requisite, make a full and complete disclosure on all the exemptions granted under different kinds of taxes in the year gone by,and that expected in the year to come.

It will be rightly argued that some exemptions are notional and do not represent a real fiscal loss. Take, for example, a 100% export-oriented unit (EoU). The waiver of customs duties on his imports and on excise duty on his exports is certainly notional, in the sense that in the absence of these waivers, the EoU would not have existed. However, the 50% concession in customs duty that the EoU enjoys on sales to the domestic tariff area is not notional, but is a real one. Then again, there are area-based exemptions for excise, income tax and sales taxes. These are not notional, just as the exemption for export profits in force till recently, and that now proposed to be reintroduced in SEZs, are not.

It is remotely possible that government is omnipotent and has got all the exemptions just right. That is, it was the best way to deal with the problem. It is however preferable to presume that mortals are fallible. The tax-paying public and the legislature will benefit from knowing the quanta of these exemptions and the purposes that this tax expenditure is being put to use. More likely than being just right, most exemptions are terribly flawed. And, but for the truly notional, can readily be substituted by superior and more efficient policy instruments. However, to enable that, the facts need to first come out.

If business in this country is forever lobbying for tax breaks and finds enough sympathy amongst policy-makers, and Parliament is fine with this, there is, therefore, the very opposite of a consensus on bearing the tax burden corresponding to a welfare-friendly state. Like the Indian rope trick, obfuscation does not work; it merely confuses. The welfare state and a libertarian attitude to tax are polar opposites. We need to get this debate up and going.

The writer is economic advisor to Icra