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Sunday, April 14, 2024

India’s flawed taxation system

If the finance minister really wants more people to come into the tax net then she should instead of foolishly resorting to rampant raids, surveys, scrutiny, demonetization and poorly thought through tax hikes, should just rein in the negative bureaucracy and introduce a simple income tax slab on agricultural income.

Opinion |

India’s 2020-21 Budget is round the corner and a struggling Indian economy means that there are some tough days ahead for the Indian taxpayer. Why? Because it has become an unsaid norm in South Asia that every time a South Asian economy struggles, just blame the taxpayer.

Somehow, it is always the lack of adequate funds and resources placed at the disposal of the development managers (meaning the government), which is to be blamed for poor governance and economic failures rather than the management inefficiencies cum incompetence of those spending these precious resources of development in these countries that perhaps are still termed as poor or at best developing nations (South Asia post the golden period of the Mughals can now be bracketed as a region historically plagued with high poverty rates).

Introduce pension after 65 years of age on the basis of tax paid by the taxpayer during his/her working life

The typical ‘excuse’ of non-delivery; ‘Blame the taxpayer; People are corrupt and just do not pay enough taxes!’ While in my next piece I will be coming to delve on such a misnomer, as it also stands today in Pakistan and whereby the way economic realities are incidentally not much different than in its co-member countries of SAARC, however, in this piece would like to mainly highlight a very interesting dialogue in this context that took place in our neighbouring India, post-presentation of India last 2019-20 Budget.

This war of words or actual facts on taxation in India took place between a number of corporate associations in India (combined under FICCI) along with the Body of Indian Chartered Accountants versus the Indian Government – India, by the way, is often quoted by the Pakistani Revenue Authorities as the model or the example that the Pakistani taxpayers need to learn from and ought to be follow!

Read more: Captain’s premature congratulations to his economic team

Miffed by the Finance Minister’s Budget Speech 2019-20, where she described India as largely a tax ‘non-compliant’ society and stressed that only 37 million Indians are filing their Income Tax Returns (ITRs) in a poor country of 1.25 billion and in her government’s opinion this lack of commitment by an average Indian in discharging his/her tax obligation happens to be the principal reason for India’s economic woes, though these private and professionals bodies did take some time to respond, however, when they did respond nearly 6 months later (towards August 2019), it was with proper numbers and statistics to counter what they termed as an inappropriate and ill-informed narrative adopted by the Indian Finance Minister.

Their reply was through a very detailed, comprehensive and a more than 200 page document released by them jointly, which in essence advised the Madam finance minister of Modi Sarkar to take into account the following realities before hurling accusations on both, the Indian individual earners and the Indian businesses:

We have 8200 million voters out of which, 75% are agriculturists, i.e. 615 million (these stand more or less exempted from Income Tax by law, but they can still buy cars, bungalows, etc. and of course your political colleagues in many ways are also enjoying this exemption).

In India around 3.30% of the Indian population files ITRs as compared to 8% in China, but if agriculture income tax is introduced on the pattern of China, this number automatically reaches 10%

The balance remains 205 million – less 24% that live below the poverty line (BPL): meaning that thereafter, it leaves about 150 million of the population that is neither agriculturist nor does it live below the poverty line. Now from this remaining number, if you take out the senior citizens, non-working housewives, unemployed youths, below-taxable income earners, the agricultural exemptions as mentioned above and work on the World Bank data stating that in India today for a typical Indian family there is 1 earning member with an average of 5/6 dependents, the mathematics comes out as: 150 – 112.50 = 37.50 Million in the earning class that should theoretically file their ITRs and which they happen to be already doing!. So really no there exists no gap at all implying that there are any tax dodgers. The finance minister thereby is stressing unnecessarily without knowing her own country.

If the finance minister really wants more people to come into the tax net then she should instead of foolishly resorting to rampant raids, surveys, scrutiny, demonetization (viewed by some as tax terrorism) and poorly thought through tax hikes, should just rein in the negative bureaucracy and introduce a simple income tax slab on agricultural income (say 10 acres plus), which in itself will quickly add about 26% of agriculturists as new taxpayers.

Read more: Imran Khan’s Economic Team: What went wrong?

Instead of only resorting to hefty fines and penalties on late filers, the focus should be to incentivize timely filers. The threshold of the income tax privilege card should be reduced where more and more taxpayers feel that it is in their range and strive to attain the status. And this, while at the same time significantly enhancing the perks and entitlements of a tax privilege card. Also, go on to introduce medical/life insurance on the basis of average ITR filed, like for example in China where the government insurance company offers coverage up to twice the amount of Gross Income filed in one’s ITR for medical insurance and up to times for life insurance.

Introduce pension after 65 years of age on the basis of tax paid by the taxpayer during his/her working life.

Let honest taxpayers get some direct benefits for their contributions. In India around 3.30% of the Indian population files ITRs as compared to 8% in China, but if agriculture income tax is introduced on the pattern of China, this number automatically reaches 10%. All this just might serve as an eye opener that the problem does not really lie with the taxpayer but in fact with the Indian government.

Read more: Pakistan’s economic environment on the edge

Well, we will try and take a cursory look next week at similar numbers in Pakistan and see whether the dilemma of the Pakistani taxpayers happens to the same as their counterparts in India or it comes out as being different.

Dr. Kamal Monnoo is a political analyst. He is an honorary consul general of the Czech Republic in Punjab, Pakistan, and a member Board of Governors of Islamabad Policy Research Institute. He is the author of two books ‘A Study of WTO’, and ‘Economic Management in Pakistan.’ He can be reached at: kamal.monnoo@gmail.com. The article originally appeared in The Nation and has been republished with the author’s permission. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.