We cannot keep flogging the same three per cent without diminishing returns. So, this is another area that must become inclusive of the many who can afford to pay a small expenditure tax to tackle revenue deficit
India is now at the top of the heap globally in terms of GDP growth at 7.5 per cent, a full percentage point higher than the six times bigger economy of China. And yet, even with a PPP rating of $7.5 trillion (two trillion in flat dollar terms), we seem to be much too poor to finance our own development, let alone take our proper place in the comity of nations.
The Prime Minister is frantically looking for, and fortunately succeeding at, garnering unprecedented levels of foreign direct investment (enough to wipe out our current account deficit by itself), during his hectic foreign travels. This, even as China uses its deep pockets as a potent instrument of its foreign policy in many parts Nepal, Pakistan, Sri lanka, several countries in Africa, just to name a few.
India has no earthly hope of keeping up with Chinese largesse or developmental work, even though we too make modest contributions in places such as Afghanistan and elsewhere in the Saarc region. Our role in the UN is also constrained by our finances. All of it put together affects both our credibility and stature. Whatever gains we have made is because of difficulties being faced by the developed world, making our relative buoyancy stand out as a beacon of hope. And then there is the relatively calm domestic security situation that is attracting even West Asian countries like the UAE, and Saudi Arabia and Iran, towards India.
But is it really intractable poverty or paucity of good policy that is keeping India downIJ The current account deficit is headed towards turning negative, thanks also to vastly lowered oil bills; and the fiscal deficit too is tightly controlled at less than four per cent of GDP. But our revenue deficit is immense and the biggest economic dampener in our national balance-sheet. We cannot, it seems, generate enough money and resources to fund our aspirations and ambitions.
The Union Minister for Finance allocates inadequate amounts to a hundred things in every Budget, in almost no more than token recognition, because it’s all he can afford. Even our defence outlays are not supported properly. There simply isn’t enough money available to the Government.
The principle reason is that our indirect taxation is too high and hampers commerce and industry when combined with rampant petty graft and corruption to add to costs. Also, our inadequate and antiquated infrastructure causes high costs to mar our efficiency, quality and competitiveness. What is in the way is lack of political will to grasp the nettle and resolve the issue.
Still, we may be heading in the right direction, not so much because of empty Government threats to bring back black money and arrest capital flight, but because of more modest but extremely far reaching structural initiatives.
We are indeed trying very hard to improve our roads, ports, airports, railways and freight corridors. Along with alternate sources of energy such as nuclear power and solar, we are also clearly headed towards becoming electricity surplus soon. This, just as we became food surplus after the concerted efforts of the Green and the White revolutions. We remain essentially food surplus even today, despite a much-increased population. But our food storage/processing, material handling abilities etc continue to be largely primitive, leading to vast wastages and spoilages.
Meanwhile, one effect of financial inclusion at the bottom of the economic pyramid via the Pradhan Mantri Jan DhanYojana which has garnered 200 million new bank accounts of the poor and an aggregate of $4.8 billion in deposits as of February 10, 2016, is to put a stop the smirking about ‘millions of empty accounts’. The other is that perhaps $4.8 billion in cash, essentially from India’s black economy, has now entered the formal banking system. Distribution of subsidies directly into these very same bank accounts by linking it to the bio-metric processed Aadhar cards, now mandatory as per law, is another step to keep the white money subsidies paid by the Government white and productive in the economy.
And now with the launch stage reached for the 10 new small banks, the 11 new payment banks, licensed over 2015 by Reserve Bank of India, more deposits, loans and payments will be made through the formal banking system. These will not involve the big players and banks struggling with scandalous levels of loans, so much as millions of heretofore unbanked small traders, micro, small and aspects of medium-sized enterprises, a good deal of the unorganised sector, small farmers, migrant workers etc. While most of these people fall below the radar when it comes to income tax, their money will go towards enriching the nation even as they are provided facilities via millions of new branches in places that had no banks, and payment banks in collaboration with post offices, mobile telephony operator networks, supermarkets and so on.
They are in no danger of being brought into the tax net via stealth because most of these people do not earn more than Rs2.5 lakh per annum which is the exemption limit at present, with a possibility that it will be raised to three lakh rupees or so. The lowest category of income tax-payers may be numerous but actually yield very little tax. It is also expensive to administer the taxation paraphernalia for this category, that pays no more than 10 per cent by way of income tax on their taxable income above the exemption limit.
However, it also highlights, given that this programme of financial inclusion will continuously enrol more and more of the population, that only three per cent of our 1.2 billion are actually PAN card holders, and even fewer than this meagre number of people are actual income tax payers. It either makes a case for the abolition of Income Tax altogether because the only ones who seem to be regularly paying it are the salaried employees,those who provide a service/consultants, who in a sense are captive and have no choice, because of the TDS provisions.
Even service tax collections can be problematic because they are post facto. Value-added tax on goods sold is immediate provided the goods are properly billed, as are most indirect taxes and excises.
But income tax and its cousin, corporate tax, need to see a vastly increased footprint in the interests of equity and justice, or suffer chronic evasion and ‘tax planning’. This present system results in low revenue realisations for the Government and difficulties in terms of its own finances and development programmes. So either more people, currently exempt, such as the rich farmers and companies catering to the agricultural space, need to be brought into the tax net, or the income and corporate taxes need to be abolished in favour of a near universal expenditure tax instead.
We cannot keep flogging the same three per cent without diminishing returns. So, this is another area that must become inclusive of the many who can afford to pay a small expenditure tax to set right the nation’s chronic revenue deficit.