There is confidence that the new Union Government will introduce changes which have the potential to transform the Indian economy. But, unless the structural pillars of this economy are re-engineered, we cannot have growth being equitably distributed
Hhere is the second part on what else must Mr Modi do. (The first part was published in The Pioneer on May 23.)
legalising black money: We should legalise all the black money stashed abroad by structuring a consolidated tax payment of 10 per cent on the black money amount. To sugarcoat the offer, even this 10 per cent could be taken in five equal annual installments of two per cent. But this has to be with two key riders. The first one is that the Government must ensure that it takes persuasive and decisive action to recover the black money stashed abroad from day one. In this, the Government should also ensure that all the black money recovered after one year of the grace period will be nationalised lock, stock and barrel. The second rider is that the Government must commit that in the future, there would be structural and financial firewalls to ensure that stashing black money abroad becomes absolutely impossible. At the same time, if there is a functional judiciary, punishing black money holders efficiently and quickly — and thus dissuading future black money transactions — will be an easy task.
The Government last week set up a Special Investigation Team to investigate various black money cases, on the orders of the Supreme Court. Some of the current estimates of black money abroad are as high as `75,00,000 crore. If we could legalise all this, look at the possibilities — a minimum 10 per cent (or `7,50,000 crore gross) could come into the Government’s kitty in the next five years; this apart from the fact that the principal bulk of black money would also come back to India. And all this would provide a huge support for the investments required to put into action various allocations and crucial Government projects.
Eliminating exemptions and simplifying the tax regime: The direct tax code and the goods & services tax systems had been touted for quite some time by the previous Government; but frankly, nothing much happened. While the DTC Bill, 2010, got referred to a Standing Committee — and languished sine die — the revised DTC has been released for comments by the previous Government only in April this year. The new Government too has given indications that it is not going to follow up on getting the DTC in order. That is disappointing. A similar fate seems to be awaiting GST, which is languishing amidst bickering between various States. Implementing these revised systems could simplify the lives of both corporations and millions of tax-payers, doing away with (or at the very least significantly improving) the jurassic income tax system that continues till date.
A starting point for all this could be to introduce a truly ‘saral’ system of taxes than just provide a namesake Saral-II form for lip service, which is most frustrating for those who actually pay taxes. Another positive and significant step could also be passing a direction that taxpayers with income up to five lakh rupees need not be questioned at all by the Income Tax department. What additional tax revenues can you get from the stressed middle-class Indian whose income is anyway subject to Tax Deduction at SourceIJ
It is evident that the complications in the tax system have ensured that only around two per cent of Indians pay income tax, instead of around 10 per cent who should have been paying. Till our tax code continues to remain complicated and continues to encourage tax evasion, we will continue to have corruption in the system. Ergo, the next related suggestion — withdraw all tax exemptions. It might sound completely radical, but implemented in a structured manner, it has the power to put a stop to many kinds of tax evasion. Why can’t we decide on a limit or percentage tax for capital gains, and a similar one for other kinds of income, instead of offering innumerable exemptions, which anyway are mostly incomprehensible to the average tax-payerIJ
One significant step in this regard could be doing away with the age-old exemption given to agricultural income. It’s a well known fact that most of the rich and the famous indulge in owning expansive farmhouses to simply build the façade of agricultural income. There are minimal checks that differentiate such individuals from perhaps the real grassroots farmer, for whom perhaps the exemption was originally intended. If agricultural income is one stark example of how subversion takes place in the system, then excise and customs duties are the other areas where evasion is now an almost accepted fact. I am shocked that we can continue to have an income tax system (along with its bureaucracy) with such a dismal corruption and bribery record. Which Government can allow such a state of being, where any and every Indian’s first thought when they think of our income tax system is that the system is supremely corruptedIJ And what happens when we allow such a system to continueIJ Almost 70 per cent of disputes and cases pending in various courts are related to tax issues. Imagine how improved our judiciary’s effectiveness could become if we were to reduce this load from the Indian courts, by solving the issue at the origin.
Mr Modi can do that by removing exemptions and introducing standard rates. The move could enable additional tax revenues in the system of around three lakh crore rupees a year. Compare this to the annual budget combined for all social welfare schemes — that is less than one lakh crore rupees.
Abolish the majority of subsidies: The tale of irresponsibly doled out subsidies is as old as the tale of corruption in India. Take a tour of the Indian farmlands and you will see how a significant majority of Indian farmers barely manage to survive, forget investing in modern seeds, fertilisers and farming methods. And still the fertiliser subsidy of India is around `70,000 crore every year. The previous Government has been criticised considerably for their decision in February this year to keep the subsidy at past year’s levels (of the `67,970 crore subsidy bill for FY2014-2015, imported urea subsidy is `12,300 crore, domestic urea subsidy is `31,000 crore and de-controlled fertilisers subsidy is `24,670 crore).
In similar lines is the story of diesel subsidies. When was the last time you saw a poor man use a diesel car or diesel generator or a diesel pump setIJ Despite that, the past years have seen diesel subsidies continue without logic. A recent study mentions that there has been under-recovery of `92,061 crore on diesel and `1,39,869 crore on petroleum by our oil companies in FY2014. Shockingly, a majority of this has gone to the benefit of private car owners. Bloomberg mentioned recently that the only thing the diesel subsidy in India is spawning is pollution and related health issues. For records, only around `12,000 crore of the above mentioned subsidy went to the agriculture sector, where also the poor and subsistence farmer obviously has gained minimally. Similarly, how many below poverty level families actually use lPG cylinders in their kitchenIJ Yet, we continue to subsidise lPG cylinders with a bill crossing `20,000 crore per year, benefitting a section of middle-class and rich people who actually would not mind paying the additional subsidised amount per lPG cylinder. Similar is the legacy of other subsidies, eating into the Indian economy.
These subsidies go hand in hand with corruption in destroying our economy. It’s now an accepted fact that the kerosene subsidy has fuelled the growth of ruthless mafia empires throughout India, who now control kerosene distribution and even adulterate petroleum and diesel products with the same. If Mr Modi really wants to ensure that the benefit of the so-called subsidies goes directly to the truly poor, then he must take the bold step of abolishing all such subsidies and actually use biometric photo identity cards to subsidise goods and services only when the poor purchase it.
I am confident that the new Government will introduce changes that have the potential to transform the Indian economy. But, unless the structural pillars of this economy are re-engineered, we cannot have growth being equitably distributed. That is what Mr Modi must do now.
(The writer is a management guru and honorary director of IIPM think tank)