Moving To Modern Systems Of Taxation

Updated: May 8 2003, 05:30am hrs
The last few weeks have seen an awful lot of discussions and discord on new measures of taxation being planned by the government. This first started with the recommendations of the Task force on Direct and Indirect taxation set up by the finance minister under the chairmanship of his own advisor, Dr Kelkar. We then had the budget, which is, of course the most important document on taxation put out by the government during the year. Running parallel to this was the decision to implement the Value Added Tax (VAT) to replace the various state level taxes from April 1. There have also been significant moves to increase the scope of service tax and extend it to many more sectors.

Most of these proposals have been vehemently opposed by different sections of the community who believe that this is affecting them. So much so, society has faced sharp divisions between economists who strongly support these measures and those who strongly oppose them. It is very useful to analyse the reasons why this is happening. For, after all, both economists and businessmen are interested in the long term welfare of the country and should have some common meeting ground. My discussions with various parties leave me with the impression that it is not the tax rates that are being objected to but it is the harassment that may follow these measures. And the frustration that all the tax that we are paying is going to meet useless non-productive expenditure, benefiting a few.

In January I had visited many centres of the country to take the opinion of people on the Kelkar proposals, as I was part of the Rajnath Singh Committee set up by the BJP to study them. I immediately found that while the manufacturing sector was very worried about the plan to remove the concessions for exports and infrastructure, most smaller businessmen and traders greatly welcomed the steps for reducing the procedures and creating an open and transparent tax system. It struck me that what the majority wanted was not lesser taxes but less harassment leading to bribery and corruption. It is noteworthy that the government in its infinite wisdom accepted most of the recommendations as regards tax administration made by Kelkar and decided to go slow with changes in tax slabs, etc.

Another point that has been coming out in these parleys has been the growing perception that the government is not using the tax money in an efficient way. I remember a leading businessman, while addressing a pre-budget seminar in Mumbai, pointed out that inspite of the Expenditure Commission under Geetha Krishnan giving detailed recommendations on how to go about cutting establishment expenditure, the progress made is very little. He said that he was fully aware that the average rate of tax in India was only 19 per cent, which is one of the lowest in the world, but frankly did not feel like paying even this because it would go to meet, as he put it, to pay the babus who are only an obstacle to progress!

Another senior chartered accountant, who is highly respected all over the world, pointed out to me that in the latest union budget, more than 75 per cent of the establishment expenses that constitutes the union government is on non-productive persons. Even senior ministers and other officials bemoan the fact that non-merit subsidies have a very negative impact on the morale of the genuine tax payer.

For example, if you are a struggling junior officer in a large city like Delhi, somehow making both ends meet, how will you feel when you look at full page advertisements put out by government departments about their achievements which will be costing several lakhs; or about the posse of Black Cats that surround our politicians as they move around in convoys of white Ambassadors; or about the huge amount of money spent in producing IIT graduates who end up in Silicon Valley No wonder there is widespread cynicism among most people regarding the use to which tax payers money is being put to.

The VAT fracas also brought out how, just the idea of being brought within the tax net is dreaded by many people. In my numerous discussions with traders and their leaders from all over country, I took great pains to explain to them that VAT was good, modern and most importantly will not increase their tax burden. Their stock reply was: We know that. We are aware that it is a pass through and the consumer will finally pay. We also know that whatever we have paid, we can get the credit. But once we get into the books of these inspectors, we can never meet their demands! So what they were objecting to (about VAT) was not the tax, but the harassment from the infamous inspectors.

It is clear that if we wish to increase tax revenues in this country and move on to modern systems of taxation, we need to do two things. Firstly, we need to ensure that the system does not harass people. Any government official who is found harassing an assessee should be severely dealt with. Secondly, we need to ensure that the common man feels that his money is being put to proper use; that it is not going towards maintaining the monolith called government but goes towards building better schools, hospitals, roads, etc. The people of India would then willingly fall in line with any tax changes. But till that happens, they will use every means at their disposal to stop such measures.

The author is a Delhi-based investment banker and Convenor of the BJP Central Economic Cell. The views expressed herein are personal. He can be contacted at