My share of the cake?
The cake has been getting bigger but the government's share has been falling. The tax to GDP ratio that reached a peak of almost 16 percent in the late 1980s has fallen since to 14 per cent of GDP in 1999-2000.
I might have thought this is fine. Isn't the trend today of reducing government? Is the government not saying that it will no longer be giving people roads, power, education and health? That these will be provided by the private sector. If it gives me less, it should be fine with taking less from me.
But no, not so. While on the one hand plans are being made to have the private sector provide public goods, on the other, plans are being made to make the public pay more for getting less.
Indeed, the advisory group on tax policy for the tenth plan has recommended that the tax to GDP ratio should be raised to 17.8 percent by 2006-07. But why did the rate fall in the first place? Primarily, it says, because the share of services in GDP is rising. And since it is industry which pays taxes, as the share of industry decreases while that of services increases, the tax base becomes narrower. Additional tax effort, the committee report recommends, has to focus heavily on the service sector.
But, strangely enough, recommendations have been made mainly for the reform of direct taxes such as personal income taxes and corporate taxes and indirect taxes such as excise, customs and sales tax. Most of these are rational and sensible recommendations as they address the discrepancies and adhocism that have crept in into the tax system over the years.
Yet, as they are meant to increase the tax to GDP ratio without expanding the tax base, they will place a higher burden on those already paying taxes.
For personal income taxes, for instance, the advisory group recommends removal of tax relief for savings in specified assets. For instance, among other things, it recommends that tax incentives given for National Saving Certificates and provident funds under Sections 88 and of interest earnings under Section 80(L) of the Income Tax Act be abolished.
The rationale is that when taken together tax relief schemes do not comprise a rational whole and do not necessarily result in additional savings. Instead, they merely encourage substitution. They have negative efficiency effects favouring debt financing, crowding out the private sector, discriminating against selected activities such as home construction out of taxed savings, and de-equalising rates of returns on savings that have the same risk or holding period. They lead to inordinately high effective rates of return on some assets.
The group argues that the incentives are iniquitous in that the manner in which they are offered tends to favour the richer tax payers. For example, deductions from income under Sections 10 and 80L and the provisions relating to rollover of capital gains tax favour upper bracket tax payers disproportionately. Given the complexity of the savings incentives structure, inequity also arises simply from asymmetric information available to the lower income earner.
So far so good. The tax system should be simplified and made more equitable. But wait. Though the group recommends removing these tax incentives, it does not recommend a cut in the tax rates. The committee, in fact, recommends that the maximum marginal tax rate should be retained at 30 percent. This means that those paying taxes such as the salaried sections will have a much higher burden of taxes than at present!
Administrative reforms such as allowing the tax administration to print forms in private presses, making forms and returns available on floppy diskettes, and such, have been recommended to make it easier to collect taxes.
What this means is that average tax rates for existing tax payers will effectively be raised. If the tax to GDP ratio has to be raised should it not be done by collecting taxes from those who are not paying taxes? Putting a greater burden on honest tax payers is hardly the path to equity and efficiency.
Some of the recommendations of the committee such as removing the surcharge ( made in the interim report) have already been accepted and implemented in the Union Budget 2001-02. Other suggestions such as abolition of tax incentives for savings may be implemented in phases over the next few years. But, it should not be forgotten that the principle of equity should apply across the population and not merely across tax payers. And, as long as people can get away without paying taxes even though they may be earning more than you or me because of the innumerable loop holes and corruption that exist in the system, equity will not be the result.