Saturday, 14 February 2009

The Great Indian Rope Trick II

Continuing the previous post on the Indian budget - this time I'm focusing on the revenue side of the P&L.

In true single entry bookkeeping fashion, the government combines revenue and capital receipts into one - if a company did this, its Board would be thrown into jail. Stripping out capital receipts, the revenue profile of the government in the P&L looks like this , again as per Definitely Not Acceptable Accounting Practices !

Corporation Tax - 29%
Individual Income Tax - 18%
Excise Duty - 18%
Customs Duty - 15%
Service Tax & Others - 8%
Non Tax Revenues - 12%

This is the central P&L ; states have their own right to levy sales tax, octroi, etc etc which is over and above these revenues.

Given the deficit and the need to trim borrowings, increasing revenues must be the second priority after curtailing expenditure, covered in the last post.

Here are some thoughts.

  • Only 3% of the Indian population pays individual income tax; about 30-35m people. Most of this is the salaried class where taxes are deducted at source. Granted there is enormous poverty in India and granted that there is a huge non working class (children, aged, many women, etc), the number of tax payers is still far too low. Roughly the basic annual income above which you have to pay taxes in India is Rs 100,000 (US$ 2500). Are there only 30m Indians who earn more than Rs 100,000 per annum. Of course not. Income from agriculture is not taxed, a complete travesty in today's world. Concealment of income and black money is rampant. So a low number of taxpayers. Target to double this in 3 years.

  • There is still a large category of income that is not taxed - long term capital gains, under the logic that this would stimulate capital formation and investment. Laudable objective, but the need for tax revenues is higher. Tax all capital gains. In fact tax all income above the minimum limit, wherever the income may be from.

  • Corporation Tax has been growing rapidly in recent years with the growth of industry. The tax code has been simplified and rates of taxes have been brought down. Hence the surge in collections. There are still some anomalies - the IT industry does not pay tax. This is illogical - they pay taxes in every country they operate, bar India !

  • Demand performance of companies that the government owns and, like any other shareholder, demand dividends. Sack managements who don't maximise dividends for the government. Get rid of non performing companies.

  • That's it; don't do anything more. Economic growth will automatically bring increase in tax collections.
One of the redeeming features of the past 10 years or so is the amount of reform that has happened on the revenue side. Tax rates have been brought down to sensible levels. Procedures have been simplified. That's why tax revenues have boomed. Don't fiddle with it too much. Leave it be, enforce it rigorously and count the rupees coming in.

None of this, is hugely difficult to do, even politically. There will be howls about taxing income from agriculture, but there isn't much of a moral argument for the protesters - earning millions from agriculture won't garner public sympathy in any big way.

Which goes back to my central argument - the problem is on the expenditure side and not on revenue.

The Indian housewife is legendary in her ability to make ends meet for the family. However small the income, she knows how to stretch it to last the month, live within the means and run a household on a budget. She controls the keys to the family purse. She does a stupendous job in millions of households.

Will Mrs Patel step forward please.


Dada said...

Obviously Mr Ramamritham (remember him?) is poring into his books gnashing his teeth...there was a movie called "Dave" some years ago. An impersonator is installed as President and he calls in his accountant to look at the US budget, and after two days his friend tells him if he did his books the way the US did its books, he would be bankrupt.

Ramesh said...

Ramamritham has morphed into Parthasarathy Shome, the dreaded author of the Fringe Benefit Tax. No, hadn't heard of Dave. Must see it.

Vinod said...

I kike the narrative and the approach of lookiing at the government from an organization/corporate perspective with accountability as a key. I will follow tis blog for more.

Ashwini Shenoy said...

Priceless ... I am glad I found this blog of yours! :-)

Ramesh said...

Oooh thoughtful train, your words lift me every day. To say I am grateful would be a huge understatement.

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